Income Tax on Rent Free Accommodation
Income Tax on Rent Free Accommodation
Rent-free accommodation means a place of residence which the employer gives to an employee and the employee’s family to stay in. Rent-free accommodation can be given either free of cost or at a concessional rate. Under the Income Tax Act, rent-free accommodation is treated as a perquisite or non-cash component of salary granted by the employer to an employee. Hence, Income Tax is applicable on rent-free accommodation received by an employee, including the Key Managerial Personnel of a company. Prequisites received by an employee are taxable under the Income Tax Act under the head of income ‘Salaries’. In the case of rent-free accommodation, determining the value of rent-free accommodation provided becomes important, since the value is included under the head of income ‘Salaries’. In this article, we look at the applicability of income tax on rent-free accommodation.
Rent Free Accommodation is a Perquisite
Perquisites are defined as a benefit which one obtains or is entitled to on account of one’s job or position. Perquisites are added under the head Salaries at the time of assessing the total income of the taxpayer for the purpose of filing an Income Tax return. Perquisites include the value of rent-free accommodation provided to the assessee by every employer. The taxpayer may be employed with more than one employer simultaneously. In such circumstances, the combined value of all the rent-free accommodations which are allotted to the taxpayer will be taxable under the Act.
Calculating Value of Rent Free Accommodation
To calculate the value of rent-free accommodation provided by an employer to an employee, the following aspects must be taken into consideration:
- The population of the city in which the rent-free accommodation is provided
- Ownership of the property provided to the employee
- Nature of furnishing which is used in the accommodation
Unfurnished Rent Free Accommodation
In case of rent-free accommodation that is provided to an employee, wherein the property is owned by the employer, the value of perquisite would be calculated based on the population of the city, as per 2001 census.
Cities with Population of up to 10 Lakh Residents
In case the rent-free accommodation is provided in a city with a population of 10 lakh residents, the rent-free accommodation would be valued as a perquisite at 7.5% of the salary.
Cities with Population of up to 25 Lakh Residents
In the case of cities with a population of less than 25 lakh residents but more than 10 lakh residents, the value of the perquisite would be 10% of salary.
Cities with Population of more than 25 Lakh Residents
In the case of cities with a population of more than 25 lakh residents, the perquisite would be valued at 15% of salary.
Furnished Rent Free Accommodation
In a rent-free accommodation provided to an employee, if there are any furnishings like air-conditioner, television, furniture, etc., then an additional amount equal to 10% of the original cost of the furniture must be added as a perquisite.
Rent Free Accommodation – Leased by Employer
In case of rent-free accommodation provided to an employee, wherein the employer has taken the property on lease or rent, the value of the perquisite would be the actual amount of lease or rental paid or 15% of the salary, whichever is lower.
Accommodation Provided by Employer at Hotel
In case an employee provides accommodation of more than 15 days to an employee, without any rent, the value of perquisite would be calculated as 24% of the salary or the actual charges paid or payable to the hotel, whichever is lower. However, this provision will not be applicable for any posting of employees on a temporary basis at a project execution site or accommodation provided at an offshore site. Thus, if an employee is provided with accommodation at a new place of posting on account of a transfer from one place to another, while the employee retains an existing place of accommodation, the following condition would apply: The value of perquisite should be determined with reference to only one accommodation which has a lower value for a period not exceeding 90 days; also, after 90 days, the value of perquisite will be charged for both accommodations.
Accommodation Provided at a Concessional Rate
In case an employer provides accommodation to an employee at a concessional rate, the value of perquisite would be calculated using one of the methods above. From the value of perquisite calculated, the amount recovered or received from the employee would be deducted and the balance amount would be the net taxable value of perquisite. Taxpayers should note that the Government has abolished Fringe Benefits Tax (FBT). Hence, at present, there is no need to file a separate return for availing of perquisites from an employer.
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