Changed I-T rules just made rent-free accommodation less taxable

Starting September 1, this year, if you are in a company accommodation, provided to you rent-free or at a concessional-rate, here is some good news. Changes to Rule 3 of the Income Tax (I-T) Act, 1961, made last month, will lighten the tax burden on this perquisite.

This follows amendments to Section 17 of the I-T Act in the Finance Act, 2023. Unlike house rent allowance (HRA) which is a financial allocation made in your salary, rent free accommodation (RFA) allows you to occupy a property owned or leased by your employer, free of cost or at a concessional rate. This could be a flat, guest house, farmhouse, hotel or a service apartment. RFA is taxable as ‘perquisite’ though there is no rental cost and is added to the employee’s salary.

The base factors

Calculation of RFA is based on distinction between the property being owned or leased by the employer and also on the population threshold of the city in which it is located. It is also computed adjusting for inflation when the employee occupies the accommodation for long.

The changes

The calculation of the population threshold of a city has been moved up from 2001 to 2011 under the new rules. While inflation will continue to play a role in computing the applicable value, the percentage of salary considered as RFA perquisite, that will be taxable, has been brought down. 

The new math

If the property is owned by employer and unfurnished: In such a case, if the property is location in a city with population over 40 lakh (Bengaluru for instance has a population of 84,43,675 as per 2011 census), the perquisite is calculated as 10 per cent of the employee’s salary, instead of the 15 per cent held earlier. Likewise, in cities with a population between 15 lakh and 40 lakh, this component will go down to 7.5 per cent, from the earlier 10 per cent and for other cities, flat 5 per cent of the salary down from 7.5 per cent earlier.

For owned and furnished accommodation: The perquisite calculation will remain the same as unfurnished accommodation plus 10 per cent of the original value of the furniture and gadgets in the property. However, if the furniture and household appliances are rented, the actual rent paid will go into the RFA computation.

If the accommodation has been leased by the company and given unfurnished: In such a situation, the perquisite will be calculated as the actual rent/lease amount or 10 per cent of the employee’s salary, whichever is lower. Likewise, for a furnished accommodation the rent and 10 per cent of the value of furnishings or the rentals paid for them will comprise the perquisite.

If put up in a hotel, the value of accommodation will be 24 per cent of the employee’s salary or actual charges, whichever is lower. Any charges paid by the employee will be deducted for the purpose of calculation.  

So, in effect the perquisite so calculated, along with other allowances, special allowances, basic and bonus/commission will constitute your taxable income/salary, leaving out dearness allowance, employer’s contribution to provident funds and retirement benefits.

These changes will have no import on government employees, who will continue to pay the government determined license fee for the accommodation and any rent if paid. Similarly for furnished accommodation the perquisite will also include the 10 per cent of the cost of furniture and appliances or the rent paid for them, whichever the case may be.

To those employees who continue to stay in the same accommodation for more than a year, the new rule provides that the value of the house can be adjusted in the subsequent years using the Cost Inflation Index.

As evident in the calculations above the taxable perquisite will shrink in value benefitting salaried taxpayers, particularly those in higher pay-bracket. Further, the CII formula will ensure that a taxpayer is not subject to excess tax in case of a hike in salary. Since the new rules came in the middle of the financial year, employee’s perquisite valuation of accommodation will be done at two different rates, up to August 2023 using old rates and from September by using new rates, hence, both employees and employers must keep these changes in mind while computing the perquisite value for the Financial Year 2023-24 and Assessment Year 2024-25.

(The writer is  Founder & CEO, Shree Tax Chambers)