Summary: The computation of the perquisite value of rent-free accommodation is governed by Section 17 of the Income Tax Act, 1961, which defines perquisites to include the value of such accommodation provided by an employer. The methodology for calculating this perquisite value is outlined in Rule 3(1) of the Income Tax Rules, based on a specified percentage of the employee’s salary, varying according to the city’s population. Recent amendments made by the Finance Act 2023 specify that this computation must adhere to prescribed rules, effective from April 1, 2024. Additionally, the Central Board of Direct Taxes (CBDT) has updated Rule 3(1), effective September 1, 2023, to apply a uniform rate of 5% for areas with populations not exceeding 15 lakhs. Unlike previous amendments, this rule is not retrospective. For determining the applicable salary for computation, it must be calculated on a due basis for the duration the accommodation was occupied, excluding components like dearness allowance unless included in retirement benefits, employer’s provident fund contributions, and exempt allowances. Salary received in advance should be excluded, while due salary should be included, along with any applicable bonuses and commissions.
Analysis
Reference shall be drawn to section 17 of the Income Tax Act, 1961 [prior to its amendment made by Finance Act 2023] which reads as under:
“17 For the purposes of sections 15 and 16 and of this section,—
……
(2) “perquisite” includes—
(i) the value of rent-free accommodation provided to the assessee by his employer.
The perquisite value should be computed as per Rule 3(1) of Income Tax Rules which prescribes specified percentage of salary to be applied depending on population of the city in which accommodation is provided.
Finance Act 2023 has amended Sec. 17(2)(i) by inserting the following phrase at the end:
“computed in such manner as may be prescribed”
In this regard, reference is made to Memorandum Explaining the provisions of Finance Bill 2023 which provides that the methodology to compute the value of rent-free accommodation is prescribed in Rule 3 of the Income-tax Rules, 1962 (the Rules), while the methodology to compute the value of any concession in the matters of rent provided to employees by the employer is prescribed in the Explanations to the clause (2) of section 17. Hence, Sec. 17(2)(i) and (ii) has been amended to rationalize this provision by prescribing a uniform methodology in the Rules for computing the value of perquisite. This amendment was proposed to take effect from the 1st day of April, 2024 and shall accordingly, apply in relation to the AY 2024-25 and subsequent assessment years. Hence, the amendment is effective from AY 2024-25.
Pursuant to the aforesaid amendment in IT Act, Rule 3(1) has been amended by CBDT vide Notification No. 65/2023 dated 18-08-2023, whereby perquisite shall be computed @5% of salary in other areas [population not exceeding 15 lakhs as per 2011 census]. As regards effective date of the Rule, the said notification reads as under:
“(1)These rules may be called the Income tax (Eighteenth Amendment), Rules, 2023.
(2) They shall come into force with effect from the 1st day of September, 2023”
In this connection, useful reference can be made to earlier amendment in Rule 3 which was made vide Notification No. S.O. 940(E) dated 25-09-2001 wherein it was provided that “They shall be deemed to have come into force on the 1st day of April 2001”. Further sub-rule (9) of said Notification provided that –
“This Rule shall come into force with effect from the 1st day of April, 2001. Provided that the employee may, at his option, compute the value of all perquisites made available to him or any member of his household for the period beginning on 1st day of April, 2001 and ending on 30th day of September, 2001 in accordance with the Rules as they stood prior to this amendment.
Thus the earlier Notification amended Rule 3 with retrospective effect from 01-04-2001 but at the same time provided option to compute perk as per pre-amended Rule. Similarly, Rule 3 was again retrospectively amended vide Notification No. 94/2009 dated 18-12-2009 wherein it was mentioned that “They shall be deemed to have come into force on the 1st day of April, 2009”.
However, the present Notification 65/2023 amending Rule 3 is not retrospective and is w.e.f. 01-09-2023.
Reference may also be made to amendment in Rule 11UA [valuation of unquoted equity shares] made vide Notification No. 61/2017 dated 12-07-2017 wherein it was specifically mentioned that “They shall come into force from the 1st day of April, 2018 and shall apply in relation to assessment year 2018-19 and subsequent years”. Thus, in respect of transaction which takes place prior to 12-07-2017, valuation has to be done as per amended Rule. However, in the present Notification 65/2023 amending Rule 3, similar language has not been used and in view of the explicit language of coming into force on 01-09-2023, it is applicable from 01-09-2023 and not for entire year.
Further Memorandum to Finance Bill 2023 provides that amendment in Sec. 17(2)(i) shall be effective from AY 2024-25. The amendment in Sec. 17(2)(i) provides that computation of perk has to be done as per prescribed rules. Thus, one has to apply the provisions of rule as applicable for the period in which the accommodation is occupied by the employee.
The second issue which arises is what components are to be considered in the salary for the respective period, when some components like commission, medical allowance or leave encashment are not paid on monthly basis but on a one time basis. In this regard, as per Rule 3(1), perk has be to be computed at a specified percentage of salary in respect of the period during which the said accommodation was occupied by the employee during the previous year. Further reference is drawn to the definition of salary as provided in clause (vi) of Explanation to Rule 3 which reads as under:-
“Explanation.—For the purposes of this rule—
…………….
(vi) “salary” includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called from one or more employers, as the case may be, but does not include the following, namely:—
(a) dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;
(b) employer’s contribution to the provident fund account of the employee;
(c) allowances which are exempted from payment of tax;
(d) the value of perquisites specified in clause (2) of section 17 of the Income-tax Act;
It can thus be said that salary for the purpose of computation of perk shall be taken on ‘due basis’ in respect of the period for which accommodation is occupied. Thus, if salary is received in advance, it should be excluded. Where salary is due but not received, it should be included. This applies to all allowances, bonus and commission also.
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