Accommodation is a valuable benefit provided by employers to their employees. Whether it’s a rent-free residence or lodging at a concessional rate, it’s essential to understand the tax implications in the realm of perquisites. This comprehensive guide dives into the intricacies of these perquisites, addressing key questions such as what constitutes rent-free accommodation and how to calculate the taxable value. We explore distinct calculations for government and non-government employees, consider accommodation provided in hotels, and define the elements of ‘salary’ for taxation purposes. We also shed light on scenarios where a house remains unoccupied and when rent-free accommodation becomes exempt. Additionally, we examine provisions for employees facing job transfers. In the world of taxation, knowledge is power, and this guide equips you with essential insights into the taxability of these accommodations, ensuring that you can make informed financial decisions.
Page Contents
- Taxability of perquisite in the form of rent-free accommodation or accommodation provided at a concessional rate
- What is rent-free accommodation?
- How to calculate the value of perquisite?
- What is the meaning of salary?
- What if the house is not actually occupied?
- When is rent-free accommodation not taxable?
- Is there any relaxation on the transfer of job?
- Important Points on Taxability of perquisite in the form of rent-free accommodation or accommodation provided at a concessional rate
Taxability of perquisite in the form of rent-free accommodation or accommodation provided at a concessional rate
Introduction
When an employer provides residential accommodation free of cost or at a reduced rate to their employees, the value of this benefit is considered taxable as a perquisite in the hands of the employee. This benefit provided by an employer is taxable irrespective of whether the residential house is owned by the employer or it is taken on rent.
The Finance Act 2023 has rationalised the provisions related to the valuation of residential accommodation provided to employees. From 01-04-2023, the value of rent-free accommodation provided to the employee by his employer is computed in such manner as may be prescribed and shall be taxable in the hands of employee.
Further, where accommodation is provided at a concessional rate, the value of such accommodation shall be taxable in the hands of employee. Here, accommodation shall be deemed to have been provided at a concessional rate, if the value of accommodation computed in such manner as may be prescribed, exceeds the rent recoverable from, or payable by, the employee.
The provisions related to rent-free accommodation or accommodation at a concessional rate provided by the employer to its employee are discussed in this tutorial and are applicable up to the financial year 2022-23 i.e. the assessment year 2023-24.
What is rent-free accommodation?
When an employer provides a residential accommodation free of rent or at concessional rent to his employees, the value of this benefit is taxable as a perquisite. Here, ‘Accommodation’ includes a house, flat, farmhouse, accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship, or other floating structure.
How to calculate the value of perquisite?
The taxable value of the perquisite will depend on factors such as whether the accommodation is furnished or unfurnished, whether it is owned by the employer or taken on rent, etc. The taxable value will be reduced by the amount of rent recovered from the employee.
Calculation of perquisite in case of Government employees
If the accommodation is provided by the Central or State Government to the employees, the taxable value will be the license fees as determined by the Government in accordance with service rules.
However, for furnished accommodation, the value of the perquisite will be increased by 10% of the furniture cost. If the furniture is taken on hire by the employer, the value of the perquisite will be increased by the actual hire charges instead of 10% of the original cost of the furniture.
Calculation of perquisite in case of non-Government employees
In the case of owned unfurnished accommodation – The taxable value will depend on the population density of the city in which the accommodation is provided. If the accommodation is unfurnished and owned by the employer, the value of the perquisite shall be:
a) 15% of salary, if accommodation is provided in a city whose population are more than 25 lakhs as per the 2001 census
b) 10% of salary, if accommodation is provided in a city whose population is between 10 lakhs and 25 lakhs as per the 2001 census
c) 7.5% of salary if accommodation is provided in a city whose population is less than 10 lakhs as per the 2001 census.
For the application of the relevant percentage as specified above, salary should be taken for the period during which the employee occupied the said accommodation during the previous year.
In the case of leased or rented unfurnished accommodation – If the employer takes an unfurnished property on lease or rent and provides it to the employee, the taxable value shall be the lower of 15% of the salary or the actual rent paid by the employer.
In the case of furnished accommodation – If the employer provides fully or partly furnished accommodation to the employee, the taxable value is calculated in the following steps:
Step 1: Compute the value of perquisite assuming the accommodation is unfurnished (as explained above)
Step 2: Add 10% p.a. of the original cost of all furniture, house appliances, gadgets, etc., owned by the employer and provided to the employee. However, if the furniture is taken on hire, the value of the perquisite shall be increased by the actual hire charges instead of 10% of the original cost of the furniture.
Calculation of perquisite in case accommodation is provided in a hotel
If an employer (Government or non-Government) provides hotel accommodation to an employee on his posting to another place, it will not be considered taxable if the employee’s stay in the hotel is up to 15 days during the year.
However, if the stay exceeds 15 days, the taxable value for additional days shall be lower of 24% of the salary for such period or actual charges incurred by the employer on such stay.
If the employer pays charges separately for lunch, dinner, laundry, etc. then those shall be taxed separately. But if there is a composite tariff for accommodation, then lunch, dinner, and laundry charges shall be taxed here under ‘rent-free accommodation’.
If the guest house in which the stay is provided is owned by the employer, the taxable value shall be computed assuming that it is an unfurnished or furnished accommodation (as explained above), as the case may be, provided to the employee.
What is the meaning of salary?
Salary shall be taken on a ‘due basis’ in respect of the period for which accommodation is occupied. Thus, if the 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.
Salary for this purpose shall be an aggregate of basic salary, dearness allowance, bonus, commission, fees, taxable allowances, leave salary encashment, and any other taxable monetary payment.
However, exempt allowances, perquisites, employer’s contribution to PF, and retirement benefits shall not be included in salary. Tax paid by the employer on behalf of the employee is a perquisite and, therefore, not includible in “salary” for the purpose of computing the perquisite value of the rent-free house.
What if the house is not actually occupied?
If an accommodation has been placed at the disposal of the employee, he should be deemed to have enjoyed the perquisite, even if he is not in the physical occupation of the accommodation. [Instruction No. 1146, dated January 27, 1978]
When is rent-free accommodation not taxable?
If the house is at a remote location – Rent-free accommodation provided to an employee working at a mining site, an onshore oil exploration site, a project execution site, a dam site, a power generation site or an offshore site shall not be taxable in the following situations:
a) The size of the house is not more than 800 sq. feet (88.89 square yards) and it is situated
at least 8 km away from the local limit of a municipality or cantonment board.
b) The accommodation is provided in a remote area which is at least 40 km away from a town, the population of which is less than 20,000 as per the latest published all-India census.
If the house is allocated to Judges – Rent-free official residence provided to a Judge of a High Court or a Judge of the Supreme Court is exempt from tax.
A similar exemption is extended to an officer of Parliament, a Union Minister, a Leader of Opposition in Parliament, and serving Chairman/members of UPSC.
Is there any relaxation on the transfer of job?
If an employee is provided with accommodation at a new place of posting and also allowed to retain the accommodation at the place of their previous posting, the taxable value shall be determined with reference to only one such accommodation which has the lower value for a period not exceeding 90 days.
After 90 days, the taxable value of both such accommodations shall be added to the salary income of the employee.
Important Points on Taxability of perquisite in the form of rent-free accommodation or accommodation provided at a concessional rate
1. When an employer provides residential accommodation free of cost or at a reduced rate to their employees, the value of this benefit is considered taxable as a perquisite in the hands of the employee.
2. ‘Accommodation’ includes a house, flat, farmhouse, accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship, or other floating structure.
3. The taxable value will depend on the population density of the city in which the accommodation is provided. If the accommodation is unfurnished and owned by the employer, the value of the perquisite shall be:
a) 15% of salary, if accommodation is provided in a city whose population is more than 25 lakhs as per the 2001 census
b) 10% of salary, if accommodation is provided in a city whose population is between 10 lakhs and 25 lakhs as per the 2001 census
c) 5% of salary, if accommodation is provided in a city whose population is less than 10 lakhs as per the 2001 census.
4. If the employer takes an unfurnished property on lease or rent and provides it to the employee, the taxable value shall be the lower of 15% of the salary or the actual rent paid by the employer.
5. If the Central or State Government provides the accommodation to the employees, the taxable value will be the license fees as determined by the Government in accordance with service rules.
6. If an employer (Government or non-Government) provides hotel accommodation to an employee on his posting to another place, it will not be considered taxable if the employee’s stay in the hotel is up to 15 days during the year.
However, if the stay exceeds 15 days, the taxable value for additional days shall be lower of 24% of the salary for such period or actual charges incurred by the employer on such stay.
7. Salary shall be taken on a ‘due basis’ in respect of the period for which accommodation is occupied. Thus, if the 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.
8. Rent-free official residence provided to a Judge of a High Court or a Judge of the Supreme Court is exempt from tax. A similar exemption is extended to an officer of Parliament, a Union Minister, a Leader of Opposition in Parliament, and serving Chairman/members of UPSC.
Conclusion
Understanding the taxability of rent-free or concessional rate accommodations is essential for both employers and employees. Compliance with tax rules can prevent unexpected tax liabilities and ensure accurate tax reporting. Ensure you know the rules and regulations applicable to your specific situation to avoid any surprises during tax assessment.
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