Taxability of Perquisite in rent-free or concessional Employee Accommodation

When an employer provides residential accommodation free of cost or at a concessional rate, the value of this benefit is treated as a taxable perquisite for the employee. This applies regardless of whether the accommodation is owned by the employer or rented. The Finance Act 2023 has updated the provisions for valuing such perquisites. Accommodation encompasses houses, flats, farmhouses, guest houses, service apartments, hotels, motels, mobile homes, ships, or other floating structures. The taxable value depends on factors such as whether the property is furnished or unfurnished, owned or rented, and whether any rent is recovered from the employee.

For government employees, the taxable perquisite is determined based on license fees set by the government. Furnished accommodations incur an additional 10% of the furniture cost, or actual hire charges if furniture is rented. For non-government employees, the calculation varies with population density and property ownership. For unfurnished accommodation owned by the employer, the taxable value ranges from 5% to 10% of salary for cities with populations between 10 to 25 lakhs (as per 2011 census), while larger cities may attract 7.5% to 10% of salary. For rented unfurnished properties, the taxable value is the lower of 10% of salary or the rent paid by the employer. If the same accommodation is provided over multiple years, the value in subsequent years cannot exceed the first year’s value adjusted by the Cost Inflation Index (CII). Furnished accommodation adds 10% of furniture cost or actual hire charges to the perquisite value.

Hotel accommodations provided during official transfers are exempt for up to 15 days. Beyond that, the taxable value is the lower of 24% of salary or actual charges incurred. Salary for these calculations includes basic pay, dearness allowance, bonuses, commission, and taxable allowances but excludes exempt allowances, employer PF contributions, and taxes paid by the employer. Employees are deemed to enjoy the perquisite even if they do not physically occupy the property. Certain exemptions exist for remote locations, such as mining or project sites, and for high-ranking officials like Judges, Union Ministers, and UPSC members. If an employee is temporarily provided accommodation at both a previous and current posting, only the lower-valued accommodation is taxable for up to 90 days; thereafter, both are included in salary. These rules ensure consistent and precise valuation of rent-free or concessional accommodation, aligning tax liability with the nature and use of the provided property.

If you want, I can also create a concise table summarizing perquisite percentages for different city populations and accommodation types to make this article more reader-friendly. This is often useful for SEO-optimized legal content. Do you want me to do that?

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.

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.

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:

Note: Up to 31-08-2023, the population shall be checked as per the 2001 census, and From 01-09-2023, the population shall be checked as per the 2011 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 10% of the salary (15% of salary up to 31-08-2023) or the actual rent paid by the employer.

In case of same accommodation is provided for more than one year – Where the same accommodation is continued to be provided to the same employee for more than one year, the valuation in subsequent years will not exceed the first year’s valuation adjusted by the Cost Inflation Index.

In this context, the “first year” means the financial year 2023-2024, or the financial year in which the accommodation was provided to the employee, whichever is later.

Thus, the perquisite value of rent-free accommodation in the subsequent year shall be lower of the following:

(a) Perquisite value computed as per the above rules; or

(b) First year’s perquisite value as adjusted by the Cost Inflation Index (CII). The adjusted first year’s perquisite value shall be computed as per the following formula:

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 1000 sq. feet (111.11 square yards) [800 sq. feet (88.89 square yards) up to 31-08-2023] 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 30 km (40 km up to 31-08-2023) away from a town, the population of which is less than 1,00,000 (20,000 up to 31-08-2023) 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.

MCQs on Taxability of perquisite in the form of rent-free accommodation or
accommodation provided at a concessional rate

Q1. When an employer provides residential accommodation _______________  to their employees, the value of this benefit is considered taxable as a perquisite in the hands of the employee.

Ans:- (a) free of cost

(b) at a reduced rate

(c) Market Value

(d) Both (a) and (b)

Correct answer: (d)

Justification of the correct answer: 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.

Q2. For the calculation perquisite for rent-free accommodation or concessional rate accommodation, the accommodation includes

Ans:- (a) A house or flat

(b) A farmhouse, guest house, or service apartment

(c) accommodation in a hotel, motel, mobile home, ship

(d) All of the above

Correct answer: (d)

Justification of the correct answer: ‘Accommodation’ includes a house, flat, farmhouse, accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship, or other floating structure.

Q3. From 01-09-2023, Mr. A, an employee of ABC Ltd. was provided with a rent-free unfurnished accommodation owned by ABC Ltd. The taxable value of the rent-free accommodation will be ________  if the accommodation is located in a city having a population between 15 lakhs and 25 lakhs.

Ans:-  (a) 15% of the salary

(b) 10% of the salary

(c) 5% of the salary

(d) Market Value

Correct answer: (c)

Justification of the correct answer: 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 7.5% of salary, if accommodation is provided in a city whose population is between 15 lakhs and 25 lakhs as per the 2011 census.

Q4. Mr. A, an employee of ABC Ltd. was provided with a rent-free unfurnished accommodation from 01-10-2023 which is taken on rent by ABC Ltd. The taxable value of the rent-free accommodation will be_______ if the accommodation is located in a city having a population between 10 lakhs and 15 lakhs.

Ans:-  (a) 5% of the salary

(b) 10% of the salary

(c) Actual rent paid by the employer

(d) Lower of (a) or (c)

Correct answer: (d)

Justification of the correct answer: 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 5% of the salary or the actual rent paid by the employer.

Q5. If the Central or State Government provides the accommodation to the employees, the taxable value of perquisite will be_______

Ans:-  (a) 15% of the salary

(b) 10% of the salary

(c) Actual rent paid by the employer

(d) License fees as determined by the Government in accordance with service rules

Correct answer: (d)

Justification of the correct answer: 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.

Q6. ABC Ltd. provides hotel accommodation facility to Mr. P on his posting to another place for 14 days. How much amount will be taxed in the hands of Mr. P?

Ans:- (a) 24% of salary

(b) Actual charges paid by the employer

(c) Lower of (a) or (b)

(d) Not taxable

Correct answer: (d)

Justification of the correct answer: 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.

Q7. Salary received in advance during the period for which accommodation is occupied shall be considered while computing taxable rent-free accommodation.

Ans:-  (a) Yes

(b) No

Correct answer: (b)

Justification of the correct answer: 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.

Q8. If the accommodation is provided to the Judge of a High Court or Supreme Court, the taxable value will be_______ .

Ans:-  (a) 15% of salary

(b) 10% of salary

(c) License fees as determined by the Government in accordance with service rules

(d) Not taxable

Correct answer: (d)

Justification of the correct answer: 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.