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Many companies offer residential facilities on rent-free basis to their employees. As per income tax law, it is known as rent-free accommodation. It, being in the nature of perquisite for the employees, forms part of their income and therefore becomes taxable. However, how to value the rent-free accommodation to make it a part of the employee’s income? Let’s understand the valuation of rent free accommodation as per the provisions of income tax law.
The income tax law has classified rent-free accommodation facilities into two categories:
Here’s what income tax law states regarding the taxability of rent-free accommodation facilities:
In the case of unfurnished accommodation, the value of perquisite will depend upon the city’s population where the accommodation is provided. The government recently introduced new rules for valuation of rent free accommodation with effect from 1st September 2023. Here’s how it is determined:
In case the accommodation is owned by the employer:
| Population of the City (as per 2011 census) | Value of Perquisite up to 31st August 2023 | Value of Perquisite after 1st September 2023 |
| Below Rs. 10 lakhs | 7.5% of the salary | 5% of the salary |
| 10 lakhs to 15 lakhs | 10% of the salary | 5% of the salary |
| 15 lakhs to 25 lakhs | 10% of the salary | 7.5% of the salary |
| 25 lakhs to 40 lakhs | 15% of the salary | 7.5% of the salary |
| Above 40 lakhs | 15% of the salary | 10% of the salary |
In case the accommodation is taken on lease by the employer:
In this case, the value of rent free accommodation should be the actual rent paid by the employee or 15% of an employee’s salary, whichever is lower.
Here, the valuation of rent free accommodation facility is the same as that of unfurnished accommodation. Further, an additional 10% of the actual price of the amenities should be included in the value of the perquisite.
If the employer provides accommodation to the employee in a hotel, then its valuation shall be lower of the following:
Any charges recovered by the employer should be deducted.
However, if the accommodation is provided for a period not exceeding 15 days or is provided on the transfer of an employee from one place to another, then it should be exempt for the employee.
The valuation of rent-free accommodation under income tax depends upon the salary earned by the employee. Therefore, what forms part of salary becomes important here. As per the income tax law, salary means:
Basic Salary
+ Dearness Allowance (where it forms part of salary for computing superannuation or retirement benefits)
+ Bonus
+ Commission
+ Fees
+ All taxable allowances
+ All taxable monetary allowances
Rules for Government Employees
There are no changes in the valuation of rent free accommodation for the government employees. The valuation will be equivalent to the license fees as determined by the state or central government as per the applicable rules. In case of furnished accommodation, the valuation will be equivalent to unfurnished accommodation plus 10% of the cost of amenities.
Other Important Considerations
If the employee continues to occupy the residential accommodation for more than one year, then the valuation shall be adjusted using Cost Inflation Index (CII) for the subsequent years. The adjusted value of perquisite shall be adjusted as follows:
Adjusted Value = Value in first year x (CII of subsequent year / CII of first year)
Also, if the accommodation is provided by the employer but remains unoccupied by the employee, it shall still form part of salary income of the employee and subject to tax accordingly.
Are you also getting confused between rent-free accommodation (RFA) vs house rent allowance (HRA)? One of the basic differences between the two is that while RFA is a perquisite for the employees, HRA is an allowance. RFA constitutes the residential facility provided directly by the employer to the employees. However, in the case of HRA, the employer reimburses the employee for the residential accommodation expenses. Another difference between rent free accommodation and house rent allowance is that while RFA forms part of the salary of the employee, HRA is exempt up to a certain limit under the income tax law.
Understanding the various provisions of income tax law is important to plan your taxes accurately. Further, it also ensures accurate disclosure and taxation of your income. In case you need any assistance in relation to tax planning and filing, feel free to contact the ASC Group.
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