SECTION 17(2)/RULE 3 – PERQUISITE AND ITS VALUATION

189. Rule 3(a) to (c) of Income-tax Rules – Valuation of perquisites represented by rent-free residential accommodation, residential accommodation at concessional rent and motor cars – Effect of amendments made by Income-tax (Amendment) Rules, 1974

1. The Income-tax (Amendment) Rules, 1974, notified by the Central Board of Direct Taxes on February 28, 1974, have substituted clauses (a), (b) and (c) of rule 3 of the Income-tax Rules, 1962, relating to valuation of certain perquisites by three new clauses.  The new clauses have made certain modifications in the provisions relating to the valuation of the perquisites by way of free residential accommodation and motor cars provided by employers to their employees.  The salient features of the new provisions are explained hereunder.

2. Valuation of rent-free residential accommodation – Salaried taxpayers have been classified into three broad categories for the purposes of determining the value of the perquisite by way of rent-free residential accommodation provided to them.  The first category consists of (a) persons holding an office or post in connection with the affairs of the Union or of a State; and (b) officers of Government whose services have been lent to a body or undertaking under the control of Government, occupying residential accommodation which has been allotted to the body or undertaking by the Government.  In the case of a person falling under the aforesaid category, the value of the rent-free residential accommodation (whether furnished or unfurnished) provided to him will be taken to be the rent which would have been determined as payable by him in accordance with the rules framed by the Government for allotment of residences to its officers.

3. The second category of employees consists of—

(a)   persons employed by the Reserve Bank of India;

(b)   persons employed by a statutory corporation or by a company in which all the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that Bank;

(c)   persons employed by a body or undertaking financed wholly or mainly by the Government;

(d)   officers of Government whose services have been lent to, or who are employed after retirement from Government service with, any company in which not less than 40 per cent of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that Bank.

In the case of persons referred to in (a ) to (d) above, the perquisite value of unfurnished rent-free residential accommodation will be taken to be 10 per cent of the salary due to the person in respect of the period during which the residential accommodation was occupied by him in the relevant previous year. [For the purposes of computing the perquisite value of rent-free residential accommodation, the term “salary” will include pay, allowances, bonus or commission payable monthly or otherwise but will not include (i) dearness allowance or dearness pay, unless it enters into the computation of superannuation or retirement benefits; (ii) employer’s contribution to the provident fund account of the employee; (iii) allowances which are exempted (from payment of tax; and (iv) any allowance in the nature of an entertainment allowance, to the extent such allowance is deductible under section 16 (ii).] If the accommodation is furnished, the value of the perquisite will first be determined on the above basis and then increased by an amount equal to 15per cent of the original cost of the furniture (including refrigerators, television sets, radio sets, other household appliances and air-conditioning equipment) provided to the employee.  If the furniture is hired by the employer, the hire charges payable for the furniture will, instead, be taken into account.

4. Employees who do not fall in the first two categories would fall in the third or residuary category mainly comprising of employees in the private sector.  In the case of these persons, the perquisite value of rent-free unfurnished accommodation will ordinarily be taken to be 10 per cent of the salary of the employee in respect of the period during which he occupied the accommodation during the relevant previous year.  If the Income-tax Officer is satisfied that the perquisite value of the accommodation computed on this basis exceeds the fair rental value of the accommodation, the value of the perquisite will be limited to such fair rental value.  However, if the fair rental value of the accommodation exceeds 20 per cent of the employee’s salary for the relevant period, the Income-tax Officer will have the discretion to increase the value of the perquisite (computed on the basis of 10 per cent of the salary) by so much of the excess of the fair rental value over 20 per cent of the salary, as he may, having regard to the nature of the accommodation, deem fit.  In the case of employees residing at Bombay, Calcutta, Delhi and Madras, the existing instructions of the Board would continue to apply and, as such, only the excess over 30 per cent of the salary will be added to the basic valuation of 10 per cent of the salary in such cases. If the employee is provided with furnished residential accommodation, the value of the perquisite will first be computed as if the accommodation were unfurnished and then increased by an amount equal to 15 per cent of the original cost of the furniture (including television sets, radio sets, refrigerators, other household appliances and air-conditioning plant and equipment) provided by the employer. If the furniture is hired by the employer, the value of the perquisite will, instead, be increased by the hire charges payable by the employer.

5. Residential accommodation at concessional rent – If residential accommodation is provided by the employer at a concessional rent, the value of the perquisite will first be determined as if the employee had been provided with rent-free residential accommodation and the amount so computed will be reduced by the rent payable by the employee.

6. Value of motor car used by employees for personal or private purposes – If a motor car is provided by the employer exclusively for the private or personal purposes of the employee, the value of the perquisite in the hands of the employee will be (a) the amount of the expenditure incurred by the employer on the maintenance and running of the motor car (including salary paid to a chauffeur), and (b) if the motor car is owned by the employer, a further amount representing the normal wear and tear of the motor car.  If a motor car is provided by the employer for use by the employee partly for his private or personal purposes and partly for use in the performance of his duties, a proportionate part of the expenditure incurred by the employer on the running and maintenance of the motor car and of the amount representing normal wear and tear of the motor car (in cases where the motor car is owned by the employer), which is attributable to the user of the car by the employee for his private or personal purposes, will be taken as the value of the perquisite in the hands of the employee. [In this connection, it may be noted that the use of a motor car by an employee for the purposes of going from his residence to the place where the duties of employment are to be performed or from such place back to his residence, will be regarded as use of the motor car for private or personal purposes and not in the performance of his duties].  If the computation of the value of the perquisite on the aforesaid basis presents any practical difficulty, the value of the perquisite will be computed on the following basis :

a.   where the motor car is owned or hired by the employer and the running and maintenance expenses are also borne by him :


in the case of a motor car with horse power not exceeding 16 or with cubic capacity of the engine not exceeding 1.88 litres
Rs.  300 per month

in the case of other motor cars
Rs. 400 per month;
b.   where the motor car is owned or hired by the employer but the running and maintenance expenses are borne by the employee :


in the case of a motor car with horse power not exceeding 16 or with cubic capacity of the engine not exceeding 1.88 litres
Rs. 100 per month

in the case of other motor cars
Rs. 150 per month.
If the employer also provides a chauffeur for running the motor car, the value of the perquisite computed on the above basis will be increased by a sum of Rs. 150 per month.

7. In cases where any particular car is not placed at the disposal of the employee but he is allowed the use of one or more motor cars out of a pool of motor cars owned or hired by the employer, the value of the perquisite will be computed in accordance with the rates specified in the preceding paragraph, as if the employee had been provided with one motor car for use partly for his private or personal purposes and partly in the performance of his duties.  However, if the horse power rating of any one of these motor cars exceeds 16 or the cubic capacity of the engine of any one of these motor cars exceeds 1.88 litres, the value of perquisite will be computed as if the employee had been provided with a motor car with horse power exceeding 16.  Further, if a chauffeur is provided by the employer to run any of these motor cars, the value of the perquisite will be increased by a sum of Rs. 150 per month.

8. If the employee owns a motor car but the actual running and maintenance charges (including salary of the chauffeur, if any) are met or reimbursed by the employer, proportionate part of the expenditure borne by the employer as is reasonably attributable to the user of the motor car by the employee for his private or personal purposes, will be taken by the Income-tax Officer as the value of the perquisite.

9. Use of motor car at concessional rate – In cases where the employee is provided with, or allowed the use of, a motor car for his private or personal purposes at a concessional rate, the value of the perquisite will first be computed as if the perquisite had been provided by the employer free of charge and the amount so computed will be reduced by the amount payable by the employee to the employer.

10. Use of conveyance other than motor cars – Where any other type of conveyance is provided by the employer to the employee, a proportionate part of the expenditure incurred by the employer on the running and maintenance of the conveyance (including amount representing the normal wear and tear of the conveyance) as is attributable to the user of the conveyance by the employee for his private or personal purposes, will be taken by the Income-tax Officer as the value of the perquisite in the hands of the employee.

11. The new provisions will take effect from April 2, 1974 and will, accordingly, apply for the purposes of deduction of tax at source from salaries during the financial year 1974-75 and for the purposes of making regular assessments in the case of salaried taxpayers from the assessment year 1975-76.

Circular : No. 130 [F. No. 142/4/74-TPL], dated 16-3-1974

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