How to value perquisite if you are providing rent-free accommodation to employee

A Residential Accommodation provided by an employer to his employee either at free of cost or at reduced cost, is the taxable perquisite as per Income tax Act, 1961. The Valuation of such perquisite is given under section 17 (2) of the act read with rule 3 of Income tax rules, 1962.

However, The Central Board of Direct Taxes (CBDT) amended the rule 3 to give effect to the changes introduced in Finance Act 2023.

The Valuation of residential accommodation provided by employer after amendment of rule 3 can be determined in the following manner:

**Note 1: In Case if any the accommodation is provided at reduced rate, Then the Value ascertained from the above table should be reduced by the amount paid by the employee

**Note 2: The amended rules take effect only from 01-09-2023

EXAMPLE: Consider Mr. A having Salary of Rs.1.68 Lakh per month [Basic Pay (80,000)+ Bonus (50000)+ Special Allowance(58,000)] was provided with an Unfurnished rent free accommodation (Rent being paid by employer 50,000) in Bangalore having population of 65 lakhs as per 2001 census and 84 lakhs as per 2011 census. Then the Value of perquisite before and after amendment is as follows:

Here we can see that, the perquisite value has been reduced after amendment when compared to calculation before amendment, benefitting the employees.

Rent free Accommodation VS House Rent Allowance

Continuing with the above example, let us take the rent of such accommodation as 50,000.

It can be concluded that, in most of the cases, Rent free accommodation exemption would be better from the tax perspective of employee.

*** Calculation of HRA exemption

Lower of:

a. Rent paid- 10% of Basic salary = 50000-(10% of 80000) = 42000
b. 40% of Basic Salary= 32000
c. HRA received= 50000

Total HRA Exemption per year = 32000*12=384,000.

Benefit for employees in subsequent year’s perquisite calculation

In Addition to the above amendments, The CBDT also introduced the calculation of perquisite value in subsequent year, by using the inflation rates.

As per the amended rule, The Value of Perquisite of rent-free accommodation in subsequent year is lower of
(a) Perquisite value computed as per the actual rules.
(b) First year's perquisite value as adjusted by the Cost Inflation Index (CII).

The adjusted first year's perquisite value can be computed as follows:

Adjusted perquisite value= First year’s perquisite value * CII of the subsequent year/CII of the first year.

Note: In this context, The "first year" means the financial year 2023-2024, or the financial year in which the accommodation was provided to the employee, whichever is later.

Example: Continuing with the above example, let us assume the Salary was increased by 20% for FY 24-25 and take cost inflation index for FY 2024-25 is 365. Then the perquisite value in FY 2024-25 can be calculated as follows:

Perquisite Value is lower of:

(a) Perquisite value computed as per the actual rules. (11,000)
(b) First year's perquisite value as adjusted by the Cost Inflation Index (CII). (10,431)

Calculation of (a) Perquisite value computed as per the actual rules.

Applicable % of salary to calculate perquisite value is 10%
Perquisite value = 10% of 1,10,000 = 11,000

Calculation of (b) First year's perquisite value as adjusted by the Cost Inflation Index (CII).

Adjusted perquisite value= First year’s perquisite value * CII of the subsequent year/CII of the first year.
= 10,000*363/348
=10,431.

The Perquisite value in FY 24-25 is Rs.10,431

So, it can be concluded that the introduction of Inflation linked cap has benefitted the employees, which reduces the perquisite value in majority of the cases.