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  • Taxation of Rent Free Accommodation

    Employees are provided with certain additional benefits or facilities by their employer, which form a part of the individual’s income he or she earns through salary. These benefits are knows as perquisites and are taxable as per the provisions stated in the Income Tax Act. Perquisites are usually provided by the employee in kind rather than in monetary form. One of the main components of perquisites given to employees is accommodation. This could be in the form of ‘rent-free accommodation’ or accommodation wherein a minimal amount of rent is paid by the employee.

    Categories of Accommodation:

    For the purpose of computation of tax, accommodation provided to an employee by an employer is separated into two different categories. These are:

    • Accommodation provided by the Central and State Government to its employees
    • Accommodation provided to those salaried individuals not employed with either the Central or State Government.

    This accommodation can be further categorised into the following:

    • Furnished Accommodation
    • Unfurnished Accommodation

    Computation of Income Tax on Accommodation Provided by the Central or State Government:

    Any type of accommodation provided to those individuals employed by the Central Government or State Government is liable to be taxed in the following manner:

    • Unfurnished Accommodation:

    With regards to unfurnished accommodation provided by the Central Government or State Government, the income tax levied on the valuation of this particular kind of perquisite is calculated by deducting the rent that the employee pays for the accommodation, from the license fee that has been charged or determined by the Central or State Government.

    • Furnished Accommodation:

    With regards to unfurnished accommodation provided by the Central Government or State Government, the income tax levied on the valuation of this particular kind of perquisite is calculated by deducting the rent that the employee pays for the accommodation, from the combined total of the license fee that has been charged or determined by the Central or State Government, and either of the following:

    • The lease fee or charge if the furniture is leased or acquired on hire
    • Depreciation amounting to 10% on the furniture or equipment if it is owned by the employer

    Computation of Income Tax on Concessional or Rent-Free Accommodation Provided by Non-Government Employees:

    Accommodation that is provided to individuals not employed with the Central or State Government may either be ‘rent-free’, wherein the employee need not pay rent to his or her employer, or ‘concessional’, wherein the employee only needs to pay a nominal or minimal amount as rent to his or her employer. Income tax levied on this type of accommodation is calculated in the following manner, as per the categorisation mentioned previously:

    Unfurnished Accommodation:

    Calculation of income tax chargeable with regards to unfurnished accommodation is further divided into two categories:

    • If the Unfurnished Accommodation is owned and provided for by the employer
      • Income tax levied will be 15% of the income or salary earned by the employee minus the actual rent that the employee pays to his or her employer. This is applicable to employees residing and working in cities where the total population is more than 25 lakhs
      • Income tax levied will be 10% of the income or salary earned by the employee minus the actual rent that the employee pays to his or her employer. This is applicable to employees residing and working in cities where the total population is more than 10 lakhs but below 25 lakhs
      • Income tax levied will be 7.5% of the income or salary earned by the employee minus the actual rent that the employee pays to his or her employer. This is applicable to employees residing and working in cities where the total population is below 10 lakhs
    • If the Unfurnished Accommodation given to the employee is leased out or rented by the employer then the income tax chargeable on the perquisite will be the amount that the employer pays as part of the lease or 15% of the employee’s income or salary, depending on which amount is lower, minus the rent that the employee pays to his or her employer.

    Furnished Accommodation:

    Calculation of income tax chargeable with regards to furnished accommodation is also further divided into two categories:

    • If the Furnished Accommodation is owned and provided for by the employer then the income tax levied will be computed by deducting the rent paid by the employee to his or her employer from the total of the taxable value of the unfurnished accommodation and either of the following:
      • The lease fee or charge if the furniture is leased or acquired on hire
      • Depreciation amounting to 10% on the furniture or equipment if it is owned by the employer
    • If the Furnished Accommodation given to the employee is leased out or rented by the employer then the income tax levied will be computed by deducting the rent paid by the employee to his or her employer from the total of the taxable value of the unfurnished leased accommodation and either of the following:
      • The lease fee or charge if the furniture is leased or acquired on hire
      • Depreciation amounting to 10% on the furniture or equipment if it is owned by the employer

    Computation of Income Tax on Accommodation Provided to an Employee by an Employer in a Hotel:

    If accommodation is given to an employee by an employer in a hotel then the income tax chargeable on this particular perquisite is calculated by deducting the rent that the employee pays to his or her employer from 24% of the employee’s income or salary or the actual lease amount paid to the hotel, depending on which amount is lower.

    If the employee in question is given accommodation for a duration of no more than a total of 15 days following his or her transfer from one location to another, then no tax will be charged since the accommodation provided will not be deemed as a perquisite.

    Computation of Income Tax in the Event of Transfer of an Employee:

    Should an employee be transferred from one location to another, and if the employee is provided accommodation at the new location, while still retaining accommodation at the previous location, then the tax levied on accommodation of this sort is as follows:

    • For a duration of not more than 90 days, the tax levied will be only on the accommodation with lower value
    • Following the completion of the 90 day period, the tax levied will be chargeable on the accommodation at both locations

    Frequently Asked Questions:

    1. How is tax on accommodation charged is the employee earns income from multiple employers?

      If an employee earns income or salary from multiple employers, and accommodation is provided for only by one of the employers, then the total income that the employee receives from all his or her employers will be taken into consideration when calculating tax on rent free accommodation.

    2. What constitutes ‘Accommodation’?

      Accommodation in this sense could be any of the following:

      • A residential house or apartment
      • A motel
      • A mobile home
      • A guest house
      • A farm house
      • A service apartment
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