CA Aashish Ramchand

Perquisites are considered as a very important element of Income from Salary. Taxation of perquisites will be valued as per Rule 3 of Income Tax Rules, 1962. Rent free accommodation is one of the perquisites provided to employees by employer. This article will cover the in depth knowledge regarding this perquisites.

The term accommodation includes the following:

1. A flat,

2. Farm House or part thereof

3. Hotel

4. Guest House

5. Service apartment

6. Caravan

7. Mobile home

8. Ship or other floating structures

Employees are divided in the following two categories:

1. Central and State Government employees

2. Private sector employees or other employees

What is the type of rent free accommodation?

1. Furnished rent free accommodation

2. Unfurnished rent free accommodation

Taxability of Rent Free Accommodation

A] Value of Furnished rent free accommodation

Value of Unfurnished accommodation

Plus: 10% per annum of cost of furniture, if the furniture is owned by owned by the employer or actual rent of furniture

B] Value of Unfurnished rent free accommodation

i) Central and State Government employees

License fee of House determined will be taxable

ii) Private sector employees or other employees

a) If it is owned by employer

    • City having population upto 10 lakhs as per 2001 census – 5% of Salary
    • City having population exceeding 10 lakhs but upto 25 lakhs as per 2001 census – 10% of Salary
    • City having population exceeding 25 lakhs as per 2001 census – 15% of Salary

b) If taken on leased by employer

    • Actual lease rent paid by employer
    • 15% of Salary

Whichever is less will be taxable

Taxability for Hotel Accommodation

a) If Hotel Accommodation is unfurnished

It is not taxable

b) If Hotel Accommodation is furnished

  • Actual charges paid or payable for such hotel
  • 24% of the salary

Whichever is less will be taxable

Note: If the hotel accommodation is provided for not more than 15 days on transfer of employee from one place to another then it will not be taxable.

What is Salary includes for purpose of Taxability of Rent free accommodation?

Salary includes all emoluments paid to an employee but excludes dearness allowance which is not included in the computation for retirement benefits, allowance which are exempt from tax, value of perquisites under section 17(2), employer’s contribution to PF and lump sum payments received on retirement.

Valuation of Rent Free unfurnished accomodationLet me provide you with an illustration to explain this concept clearly –

Let us take the case of Mr. Narayan, an employee of X Pvt. Ltd, posted at Ajmer (population: 18 lakh), drawing Rs. 3,00,000/- as basic salary, Rs. 10,000/- as dearness allowance which forms part of salary for all retirement benefits and Rs. 5,000/- as commission. The company also provides him with a rent free unfurnished accommodation in Ajmer. The house is owned by the company. Fair rent of the accommodation is Rs. 55,000/- per annum.

In this case the value of the perquisite in respect of rent free accommodation owned by the employer depends upon the salary of the employee. Salary for this purpose of computation of the perquisite value works out to be Rs. 3,15,000/- i.e. Rs. 3,00,000 + Rs. 10,000 + Rs. 5,000. Fair rent of the accommodation is not taken into consideration. As the accommodation is situated in a city having a population exceeding 10 lakh but not exceeding 25 lakh, 10% of the salary i.e. Rs. 31,500 is the taxable value of the perquisite.

(Author is CA by profession &   Co-Founder of  Make My Returns (www.makemyreturns.com) & can be reached at connect@makemyreturns.com)

(Republished With Amendments)

More Under Income Tax

18 Comments

  1. vishal l khandelwal says:

    There is a error in your data. If the population is less than 10 Lakhs then value of perquisites will be 7.5% of the salary. Please change this.

  2. Vinod kumar says:

    If I am working in public sector enterprise (psu),unfurnished accommodations provided by them owned by government .
    In which category will come
    a–government
    B- private

    Please suggest.

  3. Harish says:

    LEAVE ENCASHMENT ON SUPERANNUATION EXCLUDED ?
    The article is very useful and informative.I shall be grateful, if kindly clarify following-
    as indicated for the purpose of valuation of perquisite the salary excludes lump sum payments received at the time of superannuation for leave encashment.
    Request please clarify for PSU/non govt employee
    whether the total leave encashment is excluded or only non taxable portion as per Sec 10(10AA).
    Thanks & regards

  4. deepak says:

    In case, director is drawing no salary and is provided rent free accommodation by employer, how will perquisite of value of rent free accommodation be calculated

  5. Arindam Chakaborty says:

    Thanks for the info. I shall be grateful, if kindly clarify in case of small towns, where population is defined Block wise, and the place is not at all considered as city, then which population is to be considered ? is the district total population or the Block ? I am posted at Cooch Behar, in West Bengal which is a district head quarter comprising of two blocks.

  6. R S MISHRA says:

    I am BHU employee in varanasi up and resides in residential quarter and do not receive HRA in lieu of this and also licence fee is deducted from my salary .whether am I undder central government employee or other category?In what process
    my rent free accomodation will be calculated?

  7. S HEMALATHA says:

    My electricity bill,water etc are getting detected in my salary.
    Kindly clarify that these should be minuses in my value of rent free accomadation

  8. Shamim Pathan says:

    Dear Sir,

    If any company provides accommodation and charging minimum rent amt. then how we calculate the valuation of perquisites?
    Can over time amt. less at the time of calculating perquisites?

    I am getting BASIC+DA+BONUS+TAXABLE ALLOWANCES For calculating perqu.

    Pls guide me about perquisites at the time of minimum rent charged.

    Thanks & Regards
    Shamim

  9. sharad says:

    What will be salary for computation,if I am getting Basic+HRA+conveyance allowance+medical allowance+education allowance+special allowance.

  10. Rajendra says:

    Dear Sir,

    If any company provides Rent free accommodation only for 6 months & next 6 months paid HRA. then how we calculate the valuation of Rent free house and what amount should be taken as Salary for the purpose of valuation ( 6 Months Salary or 12 months Salary)

    Thanks & Regards
    Rajendra

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