Tax benefit. Income Tax Dept revises rent-free accommodation valuation, boosting take-home salaries for employees

Employees enjoying rent-free accommodation will now have higher takeaway salaries, as Income Tax Department has rationalized the computation method for rent-free accommodation.

The Central Board of Direct Taxes (CBDT) has notified the changes in the Income Tax Rules. The changes will come into effect from September 1. Experts say revised computation provisions have been re-introduced, addressing the valuation of rent-free accommodations. These provisions incorporate the insights from 2011 census data and aim to rationalize the perquisite value calculation.

As per the amended rule, if unfurnished accommodation is provided to employees other than the Central or State Government employees and such accommodation is owned by the employer then the valuation shall be 10 per cent of salary in cities with a population exceeding 40 lakhs as per a 2011 census. Earlier, the valuation was 15 per cent and city classification was 25 lakhs as per the 2001 census.

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In cities with a population exceeding 15 lakhs but not exceeding 40 lakhs as per the2011 census (earlier, 10 lakhs but not exceeding 25 lakhs as per 2001 census), the valuation has been lowered to 7.5 per cent of salary from 10 per cent. For other areas, it lowered to 5 per cent from 7.5 per cent in respect of the period during which the said accommodation was occupied by the employee during the previous year as reduced by the rent, if any, actually paid by the employee.

Where the accommodation is taken on lease or rent by the employer, then it shall be valued at the actual amount of lease rental paid or payable by the employer or 10 per cent of salary (reduced from 15 per cent), whichever is lower, as reduced by the rent, if any, actually paid by the employee. A new proviso has been inserted for the valuation of rent-free accommodation owned by the employer and occupied by the same employee for more than one previous year. In such a case, the valuation calculated as per aforementioned rates shall not exceed the valuation for the first previous year arrived at by applying the Cost Inflation Index.

Commenting on the change, Gaurav Mohan, CEO of AMRG & Associates said: “Employees enjoying Rent free accommodation would see rationslisation of perquisite value leading to a reduction in taxable salary, increasing the net take-home pay.” It is worth noting that the reduction in the perquisite value of rent-free accommodations will yield dual implications: on the one hand, it will generate tangible savings for employees, while on the other hand, it will result in a corresponding decrease in government revenue.

However, according to Mohan, this change will lead to disproportionate benefits for higher-income employees who receive expensive accommodations. Lower-income employees with more modest accommodations might not experience significant tax relief. Moreover, “this shift might prompt corporate employers to strategically revisit and potentially reshape their existing compensation frameworks, particularly if they can capitalize on tax advantages for their workforce,” he said.

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