Rent Free Accommodation: Computation & Taxability

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Employers usually provide several facilities to their employees one of which is Accommodation for Residence of the Employee. Sometimes, this accommodation is given to the employee without any charge and in some cases a nominal rent is received from the employee.

Such facilities which are given not in cash but in kind by the employer are referred to as Perquisites. If these facilities were not given by the employer, the employee would have incurred expenditure for such facilities from his own pocket.

And therefore, such perquisites (facilities) are considered as additional benefits arising to the employee from his employment and income tax is also liable to be paid on such facilities received in kind by the employee.

Such additional facilities are added to the salary income of the employee as Perquisites in the Income Tax Return and chargeable to Tax as per Income Tax Slab Rates.

Income Tax treatment of Rent Free or Concessional Rate of Accommodation

In some cases, the Accommodation is Rent Free to the Employee i.e. No Rent is liable to be paid by the Employee and in some cases, a concessional rent is charged from the employee. Both of these are benefits given to the employee in kind and therefore form a part of perquisites and income tax is liable to be paid on such perquisites.

Accommodation given to an employee is divided in the following categories and tax treatment of each category is separate:-

  1. Accommodation given by Govt
    1. Unfurnished Accommodation
    2. Furnished Accommodation
  2. Accommodation given by Non Govt.
    1. Unfurnished Accommodation
    2. Furnished Accommodation

Income Tax on Accommodation given by the Govt.

If any accommodation is given by the Central or the State Govt to its employees, income tax would be levied in the manner specified below.

Treatment in case of Unfurnished Accommodation
License Fee determined by Central or State Govt  xxx
(Less) Rent paid by the Employee (xxx)
(=) Taxable value of perquisite for Unfurnished Accommodation  xxx

 

 Treatment in case of Furnished Accommodation
License Fee determined by Central or State Govt  xxx
(Add) Lease Charges of Furniture in case of Leased Furniture or 10% Depreciation on Furniture in case it is owned by Employer  xxx
(Less) Rent paid by the Employee (xxx)
(=) Taxable value of perquisite of Furnished Accommodation  xxx

Income Tax on Rent Free/ Concessional Accommodation given by Non Govt

In case the employer is not Central or State Govt., the income tax on Rent Free/ Concessional Rate of Accommodation would be levied in the manner specified below:-

In case of Unfurnished Accommodation

In case of Unfurnished Accommodation, it should first be ascertained whether the accommodation is owned by the employer or the employer has taken the accommodation on lease.

In case Unfurnished Owned Accommodation is provided by the Employer
Population exceeds 25 Lakhs Population exceeds 10 Lakh but less than 25 Lakh Population is less than 10 Lakh
15% of Salary 10% of Salary 7.5% of Salary
(Less) Rent paid by Employee (Less) Rent paid by Employee (Less) Rent paid by Employee
 

In case Unfurnished Leased Accommodation is provided by the Employer,

Actual Rent paid by Employer or 15% of Salary (whichever is lower)  xxx
(Less) Rent paid by Employee (xxx)
(=) Taxable value of Perquisite xxx

In case of Furnished Accommodation

In case of Furnished Owned Accommodation  provided by the Employer

Value of Unfurnished Owned Accommodation as computed above  xxx
(Add) Lease Charges of Furniture in case of Rented Furniture or 10% Depreciation on Furniture in case it is owned by Employer  xxx
(Less) Rent received (xxx)
(=) Taxable Value of Perquisite  xxx
 

In case of Furnished Leased Accommodation, i.e. Accommodation is leased by Employer

Value of Unfurnished Leased Accommodation as computed above xxx
(Add) Lease Charges of Furniture in case of Leased Furniture or 10% Depreciation on Furniture in case it is owned by Employer xxx
(Less) Rent received (xxx)
(=) Taxable Value of Perquisite xxx

Income Tax on Accommodation provided by Employer in a Hotel

Lease Charges payable to the Hotel or 24% of Salary (whichever is lower) xxx
(Less) Rent paid by the Employee (xxx)
(=) Taxable Value of Perquisite xxx

However, in case such accommodation is provided for a period not exceeding 15 days on his transfer from one place to another, it wont be considered as a Perquisite. and therefore tax wont be levied in such a case.

Exception for Accommodation on Account of Transfer

Where on account of Transfer of an Employee from one place to another, the employee is provided with at the new place of posting while retaining the accommodation at the other place, the taxable value of such accommodation is determined with reference to only 1 such accommodation which has the lower value for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both accommodations.

Meaning of Salary for the purpose of computation of Taxable Value

Salary includes pay, allowance, bonus, commission or any other monetary payment by whatever name called but does not include:-

  1. Dearness Allowance or Dearness Pay unless it enters into the computation of Superannuation or Retirement Benefits of the Employee
  2. Employers Contribution to the Provident Fund Account of the Employee
  3. Allowance which are exempted from the payment of Tax
  4. Value of Perquisites specified in Section 17(2)

Other Relevant Points

  1. Furniture includes TV, Radio, Refrigerator, AC, Other Gadgets etc
  2. Accommodation includes a House, Flat, Farm House or part thereof or accommodation in a motel, service apartment, guest house, caravan, mobile home, ship or other floating structure
  3. Motel includes licensed accommodation in the nature of Motel, Service Apartment or Guest House
  4. Salary is to be computed on due basis for the period for which the rent free accommodation has been provided to the employee.

If the employee receives salary from more than 1 employer, the aggregate of the salary received from both the employers for the period for which the accommodation is provided has to be taken into account for the purpose of rent free accommodation even though the accommodation has been provided only by 1 employer.

A Personal Finance enthusiast, Karan is the founder of charteredclub.com and loves to discuss about Money related matters.