[Analysis] of Revised Rent-Free Accommodation Valuation Rules

Table of Contents

1. What is rent-free accommodation?
2. How to calculate value of perquisite?
3. Calculation of perquisite in case of Govt. employees
4. Computation in case of non-Government employees
5. Calculation of perquisite in case accommodation is provided in hotel
6. What is the meaning of salary?
7. What if house is not actually occupied?
8. When rent free accommodation is not taxable?
9. Is there any relaxation on transfer of job?

It’s quite common for employers to offer residential accommodation to their staff. As per the Income Tax Act, 1961 if an employer provides residential accommodation to its employees free of cost or at concessional rates, the value of such benefit is taxable as perquisite in the hands of employees. The taxability of such rent-free accommodation is governed by Section 17(2) of the Act. Further, the valuation of such perquisite is determined in accordance with Rule 3 of the Income Tax Rules, 1962.

The taxable value of the perquisite is contingent upon various factors, like, whether accommodation is furnished or unfurnished, whether it is owned by the employer or taken on rent, etc. Additionally, the computed taxable value is subject to reduction by any rent amount recoverable from the employee.

In order to bring consistency in the valuation method used to compute the taxable value of these perquisites, amendments were made to section 17(2) vide Finance Act, 2023. Pursuant to such an amendment, the Central Board of Direct Taxes (CBDT) has amended Rule 3, providing the revised method for the valuation of rent-free accommodation. The changes are with respect to valuation rate, population threshold of a city, and meaning of remote area. Further, a new proviso related to an inflation-linked cap is introduced in cases where the same accommodation is provided to the same employee for more than one year.

1. 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 such benefit extended to an employee is taxable as perquisite. ‘Accommodation’ here includes a house, flat, farmhouse, accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure.

An accommodation provided to an employee to enable him to discharge his official duties shall not be termed as perquisite. In other words, in order to be construed as perquisite, the residential accommodation should be provided for the benefit of the employee and not to discharge the duty assigned to him¹.

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. employees²

If accommodation is provided by the Central Government or any State Government to the employees, the taxable value shall be the license fees as determined by the Government in accordance with service rules. However, in case of furnished accommodation value of perquisite shall be increased by 10% p.a. of the cost of furniture. In case such furniture is hired by the employer, value of perquisite shall be increased by the actual hire charges instead of 10% of original cost of furniture.

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 be³:

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:

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:

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.

The perquisite value shall be computed as under:

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:

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 on his posting to another place, nothing would be taxable if his stay in hotel is up to 15 days during the year. However, if stay exceeded 15 days, the taxable value for additional days shall be lower of 24% of salary for such period or actual charges incurred by the employer on such stay.

If employer pays charges separately for lunch, dinner, laundry, etc. then those shall be taxed separately. But if there is composite tariff for accommodation, then lunch, dinner, laundry charges shall be taxed here under ‘rent free accommodation’⁶.

If the guest house in which stay is provided is owned by the employer, the taxable value shall be computed assuming that it as an unfurnished or furnished accommodation (as explained above), as the case may be, provided to the employee.

6. What is the meaning of salary?

Salary shall be taken on ‘due basis’ in respect of the period for which accommodation is occupied. Thus, if 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 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 perquisite value of rent-free house.

7. What if house is not actually occupied?

The CBDT has clarified⁷ that 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. Similarly, no abatement in the value of the perquisite is permissible for the periods of leave/official tours/private tours on the ground that the employee has not physically occupied the accommodation during those periods⁸.

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 (111.11 square 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 populationof 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.

1. Saipem SPA v. ITO (2002) 254 ITR 2 Del. (A.T)
2. Employees of a local authority or a foreign Government are treated as non-Government employees for this purpose. Further, employees of autonomous, semi-autonomous institutions, PSUs/PSEs & subsidiaries, Universities, etc. are not covered under this method of valuation.
3. Rule 3 of the Income-tax Rules, 1962 as revised by Income tax (Eighteenth Amendment), Rules, 2023 vide Notification No. 65, dated 18-08-2023. The amendments are effective from 01-09-2023.
4. Population shall be checked as per 2001 census.
5. Population shall be checked as per 2011 census.
6. Circular No. 8/2012, dated October 5, 2012.
7. Instruction No. 1146, dated January 27, 1978
8. CIT v. Bawa Singh Chauhan (1984) 150 ITR 8 (Del.)