Tax relief for employees residing in accommodation provided by employer

A ‘perquisite’ signifies a non-monetary benefit extended by employers to their employees.  The value of such perquisites is taxable in the hands of the employees. Determining the value of perquisite involves a range of methodologies specified under income tax rules.  The recent notification issued by the Income-Tax Department amends the existing valuation rules for rent-free accommodation provided by employers and provides much-needed tax relief to the salaried class. 

The relief provided can broadly be categorised in three baskets; (i) alignment of the city where the accommodation is provided with the 2011 census, (ii) lower rates for perquisite valuation and (ii) tax relief in cases where the same accommodation is provided for more than one year.   

Alignment with Census 2011 Population Data

The perquisite value of rent-free accommodation, where the employer is the owner of the accommodation, follows a tier structure for taxation based on the population of the city where such accommodation is provided. Earlier, the classification of the city into different tiers was based on the city’s population as per the 2001 census. This has now been updated to census 2011.  Further, the population threshold is also revised to reflect the demographics according to the 2011 census, as provided below:

The updated modifications encompass cities that have grown significantly in the recent past, such as Nashik, Indore, and Ghaziabad as tier-one cities, which were previously classified as tier-two cities.

Revised rates for perquisite valuation

The rates for valuation of perquisite have been lowered for both accommodation owned or leased by the employer as below:

In case of accommodation owned by employer:

To illustrate, consider an individual, X, employed in Thane with an annual salary of ₹20 lakh. The employer provides him with a rent-free accommodation, owned by the employer. Under the revised rules, X’s taxable perquisite is 10 per cent of ₹20 lakh, i.e., ₹2 lakh, compared to the existing taxable perquisite of 15 per cent of ₹20 lakh, i.e.,₹3 lakh. This amendment results in appreciable tax savings for employees.

In case of accommodation leased by the employer:

Adjustment for multiple-year accommodation

A new provision has been introduced providing tax relief to employees where the same accommodation is offered by the employer for more than one year.  In such cases, the perquisite value of the rent-free accommodation determined as per the rules is capped at the first year’s perquisite value adjustment for the Cost Inflation Index.

For example, if Mr X continues to reside in the same employer-provided accommodation in Mumbai, and considering the following facts:

The perquisite valuation will now be:

The newly updated regulations by the department modernise the tax framework with current data, leading to potential tax savings for employees. The supplementary clarification ensures that perquisites aren’t intrinsically tied to salary increments but, rather, reflect the alterations in accommodation arrangements. In essence, these regulatory adjustments signify a contemporary and holistic approach to tax assessment. 

The author is Partner, Nangia Andersen India

(With inputs from Neet Brahma)

COMMENT NOW