NEW DELHI: In a major relief to taxpayers using rent-free accommodation provided by the employer, the tax department has lowered the valuation of such an accommodation for the purpose of tax calculation. The change in calculation will lead to higher take-home salaries for employees living in rent-free accommodations.
A notification to this effect was issued late on Friday night. The accommodation provided to employees would now be valued at 10% of salary (lowered from 15% earlier) in cities with a population exceeding 40 lakhs as per the 2011 census (earlier 25 lakhs as per the 2001 census), 7.5% of salary (reduced from 10%) in cities exceeding 15-40 lakh population and 5% of salary (reduced from 7.5%) in other areas. The revised computation will be effective from 1 September 2023.
The new provisions incorporate the insights from 2011 census data and aim to rationalise the perquisite value calculation. As per the Income Tax Act, employees availing rent-free accommodation from their companies are eligible to pay tax on an equivalent amount of rent for the accommodation.
Rent-free accommodation is considered a prerequisite offered to an employee by an employer, and the same is taxable under the head of income from ‘Salaries’.
According to Gaurav Mohan, CEO of CA firm AMRG & associates, after the change employees enjoying rent-free accommodation would see the rationalisation of perquisite value leading to a reduction in taxable salary, increasing the net take-home pay.
“It is worth noting that the reduction in the perquisite value of rent-free accommodations will yield dual implications -- on the one hand, it will generate tangible savings for employees, while on the other hand, it will result in a corresponding decrease in government revenue,” says Gaurav Mohan.
According to tax experts, this change will lead to disproportionate benefits for higher-income employees who receive expensive accommodations. Lower-income employees with more modest accommodations might not experience significant tax relief. Tax experts say that the change in the valuation rules would prompt corporate employers to strategically revisit and potentially reshape their existing compensation frameworks, particularly if they can capitalise on tax advantages for their workforce.
The notification also inserts a new provision for the valuation of rent-free accommodation owned by the employer and occupied by the same employee for more than one previous year. In such a case, the valuation calculated will not exceed the valuation for the first previous year arrived at by applying the Cost Inflation Index.