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Valuation of Rent Free unfurnished accomodation

In this article I’ll be discussing the valuation of a rent free unfurnished accommodation given to an employee as a perquisite. The term accommodation includes a flat, farm house (or part thereof) or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure. For the purpose of valuation of the perquisite in respect of unfurnished accommodation, employees are divided in the following two categories:

CA Aashish Ramchand

In this article I’ll be discussing the valuation of a rent free unfurnished accommodation given to an employee as a perquisite.

The term accommodation includes a flat, farm house (or part thereof) or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure. For the purpose of valuation of the perquisite in respect of unfurnished accommodation, employees are divided in the following two categories:

1. Central and State Government employees

2. Private sector employees or other employees

The value of perquisite in respect of accommodation provided to such Central and State Government employees is equal to the license fee which would have been determined by the Central or State Government in accordance with the rules framed by the Government for allotment of houses to its officers.

 Valuation of rent free Furnished accommodation

The value of perquisite in respect of rent free accommodation provided to Private sector employees of other employees depends on the salary of the employee and the lease rent of the accommodation. For the purpose of valuation of perquisite, the term salary includes

1) Basic Salary

2) Dearness allowance/ pay, if the terms of employment so provide

3) Bonus

4) Commission

5) Fees

6) All other taxable allowances (excluding amount not taxable)

7) Any monetary payment which is chargeable to tax (by whatever name called)

For this purpose salary does not include –

1) Dearness allowance/ pay, if not taken into account while calculating retirement benefits, like provident Fund, gratuity etc.

2)  Employer’s contribution to provident fund account of an employee

3) Lump sum payments received at the time of termination of service or superannuation or voluntary retirement like gratuity, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments

4) All allowances which are exempt from tax.

5) Value of perquisites u/s 17(2)

Now that we have determined the salary, let’s discuss the basis of valuation of the perquisite

If such rent free unfurnished accommodation is provided to a private sector employee in a city where the population exceeds 25 lakh, and where such accommodation is owned by the employer himself, then 15% of the salary in respect of the period during which the accommodation is occupied by the employee, will be valued as the perquisite. If however the accommodation is taken on lease by the employer, then the amount of lease rent paid or payable by the employer, or 15% of the salary, whichever is lower will be valued as the perquisite.

If such rent free unfurnished accommodation is provided to a private sector employee in a city where the population exceeds 10 lakh but does not exceed 25 lakh, and where such accommodation is owned by the employer himself, then 10% of the salary in respect of the period during which the accommodation is occupied by the employee, will be valued as the perquisite. If however the accommodation is taken on lease by the employer, then the amount of lease rent paid or payable by the employer , or 15% of the salary, whichever is lower will be valued as the perquisite.

If such rent free unfurnished accommodation is provided to a private sector employee in a city where the population does not exceed 10 lakh, and where such accommodation is owned by the employer himself, then 7.5% of the salary in respect of the period during which the accommodation is occupied by the employee, will be valued as the perquisite. If however the accommodation is taken on lease by the employer, then the amount of lease rent paid or payable by the employer, or 15% of the salary, whichever is lower will be valued as the perquisite.

Let 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)

Categories: Income Tax

View Comments (14)

  • 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?

  • 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.

  • 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

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