Analysis of Revised Rent-Free Accommodation Valuation Rules, 2023 as amended by Income Tax Notification No. 65/2023 dated 18th August, 2023
Employers often provide residential accommodations to their employees, and under the guidelines of the Income Tax Act, 1961, when such accommodations are given for free or at reduced rates, the value of this benefit becomes taxable as a perquisite in the employees’ hands. This taxation is governed by Section 17(2) of the Act, while the specific valuation of this benefit is determined according to Rule 3 of the Income Tax Rules, 1962.
The taxable value of this benefit is influenced by various factors. These include whether the accommodation is furnished or unfurnished, whether the employer owns the accommodation or rents it, and other relevant considerations. Furthermore, the calculated taxable value can be decreased by any rent amount that the employee is required to pay.
To ensure a consistent approach in assessing the taxable value of these perquisites, changes were introduced to Section 17(2) through the Finance Act of 2023. In line with these amendments, the Central Board of Direct Taxes (CBDT) has also updated Rule 3, outlining a revised method for valuing rent-free accommodations. The modifications primarily relate to the valuation rate, the city’s population threshold, and the definition of a remote area. Additionally, a new provision has been introduced to establish an inflation-linked cap in cases where the same accommodation is provided to an employee for more than one year.
1. What is rent-free accommodation?
If the employer provides an apartment to its employees without rent (or for a reduced rent), the value of the benefit to the employee is taxable. “Accommodation” herein includes a house, apartment, farmhouse, hotel accommodation, motel, service apartment, guest house, caravan, mobile home, boat or other floating structure.
Accommodation that enables the employee to perform his official duties is not considered mandatory. In other words, to be considered mandatory, the residence must be provided for the benefit of the employee and not for the performance of a duty assigned to him (see Saipem SPA v. ITO (2002) 254 ITR 2 Del. (A.T)).
2. How to calculate value of perquisite?
The taxable value of perquisite shall depend on factors, like, whether accommodation is furnished or unfurnished, whether it is owned by the employer or taken on rent, etc. The taxable value so calculated shall be reduced by the amount of rent, if any, actually recovered from the employee.
3. Calculation of perquisite in case of Govt. employees
If accommodation is provided by the Central Government or by any State Government to employees, the taxable amount will be the leave fees as determined by the Government in accordance with the service rules. However, in the case of furnished accommodation, the value of the advantage will be increased by 10% p.a. the cost of furniture. If such furniture is rented by the employer, the prerequisite amount will be increased by the actual rent charges, rather than 10% of the original cost of the furniture.
Note: Employees of a local authority or a foreign government are treated as non-governmental officials for this purpose. In addition, employees of autonomous and semi-autonomous institutions, PSUs/PSEs and subsidiaries, universities, etc. are not covered by this valuation method.
4. Computation in case of non-Government employees
4.1. In case of owned unfurnished accommodation
The cost of accommodation is generally higher in cities which have high population density. Therefore, the taxable value will depend on the population of the city in which accommodation is provided. If accommodation provided to an employee is unfurnished and owned by the employer, the value of perquisite shall be calculated as per Notification No. 65, dated 18-08-2023 as provided below:
| Population of City | Perquisite Value | |
| Before 01-09-2023
Population as per 2001 census |
On or after 01-09-2023
Population as per 2011 census |
|
| Below 10,00,000 | 7.5% of Salary | 5% of Salary |
| 10,00,000 to 14,99,999 | 10% of Salary | 5% of Salary |
| 15,00,000 to 24,99,999 | 10% of Salary | 7.5% of Salary |
| 25,00,000 to 40,00,000 | 15% of Salary | 7.5% of salary |
| Above 40,00,000 | 15% of Salary | 10% of Salary |
For application of the relevant percentage as specified above, salary should be taken for the period during which the said accommodation was occupied by the employee during the previous year.
It is to be noted that the rates used to calculate the value of rent-free accommodation have been revised with effect from 01-09-2023. Thus, if an employer has offered rent- free accommodation prior to this date, the old rates will be used to determine the perquisite value until 31-08-2023. From 01-09-2023 onward, the perquisite value will be computed using the new rates.
Example 1, An employee, Mr. Sharma, lives in a city having a population of 35,00,000 Lakhs. His employer provides him with unfurnished accommodation throughout the financial year 2023-24. His monthly salary is Rs. 50,000. Compute the perquisite value of rent-free accommodation.
The perquisite value shall be computed as under:
| Particulars | 01-4-2023 | 1-09-2023 |
| to | to | |
| 31-08-2023 | 31-03-2024 | |
| Population of city | 35,00,000 | 35,00,000 |
| Monthly salary (A) | Rs. 50,000 | Rs. 50,000 |
| No. of months for which accommodation is provided (B) | 5 months | 7 months |
| Salary for relevant period (C = A * B) | Rs. 2,50,000 | Rs. 3,50,000 |
| Valuation rate (D) | 15% | 7.5% |
| Perquisite value for relevant period (E = C * D) | Rs. 37,500 | Rs. 26250 |
| Total perquisite value of rent-free accommodation | Rs. 63,750 | |
Example 2, suppose in example 1, Mr. Sharma relocates to a city with a population of 50,00,000 people on September 1, 2023, and his employer increases his monthly salary to Rs. 60,000 from that date. In such a case, the perquisite value of rent-free accommodation shall be as under:
| Particulars | 01-4-2023 | 1-09-2023 |
| to | to | |
| 31-08-2023 | 31-03-2024 | |
| Population of city | 35,00,000 | 50,00,000 |
| Monthly salary (A) | Rs. 50,000 | Rs. 60,000 |
| No. of months for which accommodation is provided (B) | 5 months | 7 months |
| Salary for relevant period (C = A * B) | Rs. 2,50,000 | Rs. 4,20,000 |
| Valuation rate (D) | 15% | 10% |
| Perquisite value for relevant period (E = C * D) | Rs. 37,500 | Rs. 42,000 |
| Total perquisite value of rent-free accommodation | Rs. 79,500 | |
4.2. In case of leased or rented unfurnished accommodation
If employer takes an unfurnished property on lease or on rent and provides it to the employee, the taxable value shall be lower of 10% of salary (previously 15% of salary until 31-08-2023) or actual rent paid by the employer.
Example 3, Mr. Sharma’s employer leases an unfurnished house for him and provides it as accommodation through out the financial year 2023-24. Mr. Sharma’s monthly salary is Rs. 70,000, and the actual rent paid by his employer for the house is Rs. 10,000 per month. Compute the perquisite value.
| Particulars | 01-4-2023
to 31-08-2023 |
1-09-2023
to 31-03-2024 |
| Monthly salary (A) | Rs. 70,000 | Rs. 70,000 |
| No. of months for which accommodation is provided (B) | 5 months | 7 months |
| Salary for relevant period (C = A * B) | Rs. 3,50,000 | Rs. 4,90,000 |
| Valuation rate (D) | 15% | 10% |
| Value of accommodation on basis of salary (E = C * D) | Rs. 52,500 | Rs. 49,000 |
| Actual rent paid by employer for relevant period (F) | Rs. 50,000 | Rs. 70,000 |
| Perquisite Value (G = Lower of F or E) | Rs. 50,000 | Rs. 49,000 |
| Total perquisite value of rent-free accommodation | Rs. 99,000 | |
4.3. In case 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:
Perquisite value computed as per the above rules; or
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:
Adjusted first year’s perquisite value = First year’s perquisite value X CII of the subsequent year / CII of the first year
The cost inflation index of the Financial Year 2023-24 is 348.
Example 4, suppose in example 1 above, Mr. Sharma’s gets a promotion and his monthly salary is increased to Rs. 1,00,000. He continues to occupy the same property in the Financial Year 2024-25. Compute the perquisite value of rent-free accommodation assuming CII for Financial Year 2024-25 is 370.
In this case, the perquisite value of rent-free accommodation based on Mr. Sharma’s salary shall be Rs. 90,000 (Rs. 1,00,000 * 12 months * 7.5%). However, this value cannot exceed the perquisite value of the Financial Year 2023-24 as adjusted by CII.
The adjusted perquisite value of the financial year 2023-24 shall be Rs. 67780 (Rs. 63750/348*370).
Thus, the perquisite value for the financial year shall be Rs. 67,780 (lower of Rs. 90,000 or Rs. 67,780).
4.4. In case of furnished accommodation
If employer provides fully furnished or partly furnished accommodation to the employee, the taxable value is computed in following three steps:
Step 1: Compute value of perquisite assuming accommodation is an unfurnished property (as explained above)
Step 2: Add 10% p.a. of original cost of all furniture, house appliances, gadgets, etc. owned by the employer and provided to the employee. However, in case furniture is taken on hire by the employer, value of perquisite shall be increased by the actual hire charges instead of 10% of original cost of furniture.
5. Calculation of perquisite in case accommodation is provided in hotel
If any employer (Government or Non-Government) provides hotel accommodation to an employee who is posted to another place, nothing would be taxable if the stay in the hotel is not more than 15 days during the year. However, if the stay exceeds 15 days, the tax base for the additional days is 24% of the salary for such period or the actual costs incurred by the employer in connection with such stay.
If the employer pays a separate fee for lunch, dinner, laundry, etc., they must be taxed separately. However, if there is a complex tariff for the accommodation, then the lunch, dinner, laundry fee will be charged according to the 8/2012 of October 5, 2012. on the basis of circular letter no. it must be entered here on the basis of “free accommodation”.
If the guest house in which the accommodation is provided is owned by the employer, the tax base must be calculated as the unfurnished or furnished accommodation provided to the employee (as above).
6. What is the meaning of salary?
Salary will be taken on an “appropriate basis” in relation to the period for which the accommodation is occupied. Thus, if the salary is received in advance, it should be excluded. Where wages are due but not received, they should be included. This applies to all allowances, bonuses and commissions as well.
Salary for this purpose shall be the aggregation of basic pay, dearness allowance, bonus, commission, fees, taxable allowances, encashment of holiday pay and any other taxable monetary payment. However, exempt allowances, benefits, employer’s contribution to PF and retirement benefits will not be included in the salary. The tax paid by the employer on behalf of the employee is mandatory and is therefore not included in “salary” for the purpose of calculating the required rent-free value of the house.
7. What if house is not actually occupied?
The CBDT (Central Board of Direct Taxes) made it clear in their instruction number 1146, which was issued on January 27, 1978, that if an employee is provided with a place to stay, it will be considered that they have received a benefit, even if they are not physically present in the accommodation. Similarly, any reduction in the value of this benefit cannot be claimed for periods when the employee is on leave, official trips, or personal trips, under the reasoning that the employee did not use the accommodation during those times. This was highlighted in the case of CIT (Commissioner of Income Tax) versus Bawa Singh Chauhan, which was decided in 1984, reported in 150 ITR (Income Tax Reports) page 8 in the Delhi High Court.
8. When rent free accommodation is not taxable?
8.1. If house is at remote location
The rent free accommodation provided to an employee working at a mining site or an onshore oil exploration site or a project execution site, or a dam site or a power generation site or an off-shore site shall not be taxable in following situations.
(a) Size of house is not more than 1,000 sq. feet (111.11square yard) and it is situated at least 8 kms away from local limit of a municipality or cantonment board.
(b) It is provided in a remote area which is atleast 30 kms away from a town, the population of which is less than 1,00,000 as per 2011 census.
8.2. If house is allocated to Judges
Rent-free official residence provided to a Judge of a High Court or to 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.
9. Is there any relaxation on transfer of job?
If employee is provided with an accommodation at new place of posting and also allowed to retain the accommodation at the place of his 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.