06 September 2023
Employment Tax
Impact: High
Summary
The Indian Tax Authorities recently notified lower rates for valuation of accommodation perquisite for Rent-free accommodation (RFA) provided by private sector employers to its employees (either owned or leased by the employer). The prescribed percentages applicable are linked to revised population threshold of cities in which the accommodation has been provided where the accommodation is owned by the employer. The authorities also introduced a cap in valuation based on the Cost Inflation Index (‘CII’) in case where the same accommodation is provided to same employee for more than one year. These changes are effective from 1 September 2023 onwards.
The Detail
The taxability of RFA is governed by Section 17(2) of the Indian Income-tax Act, 1961 (‘the Act’), while the valuation of the perquisite is determined in accordance with Rule 3 of the Income Tax Rules, 1962 (‘the Rules’). The taxable value of perquisite depends on various factors such as whether accommodation is furnished or unfurnished, whether it is owned by the employer or taken on rent, etc.
In recent notifications issued by the CBDT [Central Board of Direct Taxes, India], the rules for valuation of RFA have been revised as follows:
| Category | Existing | Effective 1 September 2023 | ||
| Accommodation owned by employer | Population (in millions) | Perquisite rates | Population (in millions) | Perquisite rates |
| More than 2.5 M | 15% of salary | More than 4 M | 10% of salary | |
| 1 M – 2.5 lacs | 10% of salary | 1.5 M – 4 M | 7.5% of salary | |
| Less than 1 M | 7.5% of salary | Less than 1.5 M | 5% of salary | |
| Accommodation taken on lease/ rent by employer | NA | Lower of: – Actual rent paid by the employer or – 15% of salary | NA | Lower of: – Actual rent paid by the employer or – 10% of salary |
There is no change/ amendment in the definition of salary to be considered for purpose of valuing the accommodation perquisite. Salary for the period the accommodation is occupied by the employee is to be considered. The taxable value as calculated shall be reduced by the amount of rent, if any, recovered from the employee.
The amendment also covers a situation where an employee consistently receives the same accommodation for over a year (whether company owned or leased). In such circumstances, the valuation of RFA in a subsequent year will not exceed the first year’s value, adjusted using CII (defined as 2023-24 or the financial year in which the accommodation was provided, whichever is later). Accordingly, taxable value of RFA in the subsequent year will be the lesser of:
• Value computed according to the Rule 3; or
• First year’s value adjusted by the CII
Adjusted first year’s value = first year’s value * CII of the subsequent year / CII of the first year.
The amendments to Rule 3 are effective from 1 September 2023. Hence, valuations before 1 September 2023 will continue based on the existing valuation rules.
Example:
Based on the plain reading of the notifications, the accommodation perquisite will be valued as under:
• An employee, Mr K, lives in a city having a population of 5 M.
• His employer provides him with a company owned accommodation throughout the Financial Year (FY) 2023-24 and there is no rent recovered from the employee.
• His monthly salary is INR 1,000,000 and he had received a bonus payment of INR 1,200,000 in December 2023.
| Particulars (For FY 2023-24) Until 31 August 2023 Effective 1 September 2023 | |||||
| Monthly salary (A) | INR 1,000,000 | INR 1,000,000 | |||
| No. of months for which accommodation is provided (B) | 5 | 7 | |||
| Salary for relevant period (C = A * B) | INR 5,000,000 | INR 7,000,000 | |||
| Bonus (received in December 2023) (D) | – | INR 1,200,000 | |||
| Total salary for purpose pf valuation (E = C + D) | INR 5,000,000 | INR 8,200,000 | |||
| Valuation rate (F) | 15% | 10% | |||
| Perquisite Value for relevant period (G = E * F) | INR 750,000 | INR 820,000 | |||
| Total perquisite value of rent-free accommodation | INR 1,570,000 | ||||
Assuming for FY 2024-25, Mr. K gets a bonus payment of INR 1,500,000 and his salary is increased from INR 1,000,000 to INR 1,300,000 per month, the perquisite would be computed as under if he continues to occupy the same accommodation in FY 2024-25 as well:
CII – FY 2023-24: 348; FY 2024-25: 370 (assumed)
| Particulars (For FY 2024-25) | Existing method | New Prescribed Method |
| Annual Salary (A) | INR 15,600,000 | |
| Bonus Payment (B) | INR 1,500,000 | |
| Salary for accommodation perquisite valuation (C) [A + B] | INR 17,100,000 | |
| Valuation rate (D) | 15% | 10% |
| Perquisite Value as per Rule – lower of:
– Accommodation value (E = C * D) or – First year’s value adjusted by the CII i.e. [1,570,000 *370/348] |
INR 2,565,000 |
INR 1,710,000 |
| NA | INR 1,669,253 | |
| Perquisite value of rent-free accommodation | INR 2,565,000 | INR 1,669,253 |
Note: A comparison of existing and new methods of determining the perquisite value of rent-free accommodation is shown in the above table only for reference purposes.
What this means
The rationalisation of Rule 3 in respect of RFA provided by the employer to employee comes as a respite as this brings down the taxable value of RFA in the wake of rising inflation. The linking of the valuation with the CII is a scientific way of valuation avoiding the requirements of rate rationalisation in future. This will help employees who are using employer provided accommodation for longer period as the taxable value will not exceed the first year’s valuation, adjusted with the CII.
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Contact us For a deeper discussion on the above, please reach out to your Vialto Partners point of contact or alternatively: · Sundeep Agarwal, Partner | sundeep.agarwal@vialto.com Further information on Vialto Partners can be found here: www.vialtopartners.com |
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