The valuation of rent-free unfurnished accommodation under the Income Tax Act, 1961 depends on the following factors:
- The location of the accommodation: The valuation is higher for cities with a population of more than 25 lakhs followed by cities with a population of more than 10 lakhs but less than 25 lakhs, and the lowest for cities with a population of 10 lakhs or less.
- The salary of the employee: The higher the salary, the higher the valuation of the rent-free accommodation.
- Whether the accommodation is owned by the employer or taken on rent: The valuation is higher if the accommodation is owned by the employer.
The following are the specific valuation rules for rent-free unfurnished accommodation:
- In cities with a population of more than 25 lakhs The valuation is 15% of the employee’s salary.
- In cities with a population of more than 10 lakhs but less than 25 lakhs: The valuation is 10% of the employee’s salary.
- In cities with a population of 10 lakhs or less: The valuation is 7.5% of the employee’s salary.
For example, if an employee with a salary of Rs.10 lakhs is provided rent-free unfurnished accommodation in a city with a population of more than 25 lakhs, the valuation of the accommodation will be Rs.1,50,000 (15% of Rs.10 lakhs).
It is important to note that there are some exceptions to the above valuation rules. For example, rent-free accommodation provided to a government employee is exempt from tax.
EXAMPLE
- Assume the employee’s salary is Rs.10 lakhs per annum.
- Delhi is a city with a population of more than 25 lakhs, so the value of the rent free accommodation perquisite is 15% of the salary, which is Rs.1.5 lakhs per annum.
- If the employer owns the accommodation, then the fair rent of the accommodation is not taken into consideration.
- However, if the employer takes the accommodation on rent, then the fair rent of the accommodation will be added to the value of the perquisite.
In this example, the total value of the rent free accommodation perquisite is Rs.1.5 lakhs per annum. This amount will be taxable as per the employee’s income tax slab.
Here are some other factors that may affect the valuation of rent free unfurnished accommodation in India:
- The location of the accommodation.
- The size of the accommodation.
- The amenities that is available in the accommodation.
- The market rent for similar accommodation in the same area.
FAQ QUESTIONS
- What is rent free accommodation?
Rent free accommodation is a perquisite provided by an employer to an employee, where the employee is not required to pay any rent for the accommodation.
- How is rent free accommodation taxed?
Rent free accommodation is taxed under the head of income “Salaries”. The value of the perquisite is determined by the following formula:
Value of perquisite = 15% of salary (in cities with population exceeding 25 lakh)
or 10% of salary (in cities with population exceeding 10 lakh but not exceeding 25 lakh)
or 7.5% of salary (in cities with population not exceeding 10 lakh)
- What are the exceptions to the taxation of rent free accommodation?
The following are the exceptions to the taxation of rent free accommodation:
* Accommodation provided to a government employee in a remote area.
* Accommodation provided to an employee in a hotel for less than 15 days due to transfer.
* Accommodation provided to a member of UPSC, Supreme Court Judge, Union Minister, Parliament official, High Court Judge, Leader of Opposition in Parliament, etc.
- What are the factors that affect the valuation of rent free accommodation?
The following factors affect the valuation of rent free accommodation:
* The location of the accommodation.
* The size of the accommodation.
* The amenities provided in the accommodation.
* The rent that would be paid for similar accommodation in the open market.
- How can I calculate the value of rent free accommodation?
You can calculate the value of rent free accommodation by using the following formula:
Value of perquisite = (Fair rent of the accommodation) x (Applicable percentage)
The fair rent of the accommodation can be determined by taking the average rent of similar accommodation in the locality. The applicable percentage is the percentage of salary that is taxable as per the above table.
- What is rent free accommodation?
Rent free accommodation is a perquisite provided by an employer to an employee, where the employee is not required to pay any rent for the accommodation.
- How is rent free accommodation taxed?
Rent free accommodation is taxed under the head of income “Salaries”. The value of the perquisite is determined by the following formula:
Value of perquisite = 15% of salary (in cities with population exceeding 25 lakh)
or 10% of salary (in cities with population exceeding 10 lakh but not exceeding 25 lakh)
or 7.5% of salary (in cities with population not exceeding 10 lakh)
- What are the exceptions to the taxation of rent free accommodation?
The following are the exceptions to the taxation of rent free accommodation:
* Accommodation provided to a government employee in a remote area.
* Accommodation provided to an employee in a hotel for less than 15 days due to transfer.
* Accommodation provided to a member of UPSC, Supreme Court Judge, Union Minister, Parliament official, High Court Judge, Leader of Opposition in Parliament, etc.
- What are the factors that affect the valuation of rent free accommodation?
The following factors affect the valuation of rent free accommodation:
* The location of the accommodation.
* The size of the accommodation.
* The amenities provided in the accommodation.
* The rent that would be paid for similar accommodation in the open market.
- How can I calculate the value of rent free accommodation?
You can calculate the value of rent free accommodation by using the following formula:
Value of perquisite = (Fair rent of the accommodation) x (Applicable percentage)
The fair rent of the accommodation can be determined by taking the average rent of similar accommodation in the locality. The applicable percentage is the percentage of salary that is taxable as per the above table.
- What is rent free accommodation?
Rent free accommodation is a perquisite provided by an employer to an employee, where the employee is not required to pay any rent for the accommodation.
- How is rent free accommodation taxed?
Rent free accommodation is taxed under the head of income “Salaries”. The value of the perquisite is determined by the following formula:
Value of perquisite = 15% of salary (in cities with population exceeding 25 lakh)
or 10% of salary (in cities with population exceeding 10 lakh but not exceeding 25 lakh)
or 7.5% of salary (in cities with population not exceeding 10 lakh)
- What are the exceptions to the taxation of rent free accommodation?
The following are the exceptions to the taxation of rent free accommodation:
* Accommodation provided to a government employee in a remote area.
* Accommodation provided to an employee in a hotel for less than 15 days due to transfer.
* Accommodation provided to a member of UPSC, Supreme Court Judge, Union Minister, Parliament official, High Court Judge, Leader of Opposition in Parliament, etc.
- What are the factors that affect the valuation of rent free accommodation?
The following factors affect the valuation of rent free accommodation:
* The location of the accommodation.
* The size of the accommodation.
* The amenities provided in the accommodation.
* The rent that would be paid for similar accommodation in the open market.
- How can I calculate the value of rent free accommodation?
You can calculate the value of rent free accommodation by using the following formula:
Value of perquisite = (Fair rent of the accommodation) x (Applicable percentage)
The fair rent of the accommodation can be determined by taking the average rent of similar accommodation in the locality. The applicable percentage is the percentage of salary that is taxable as per the above table.
- What is rent free accommodation?
Rent free accommodation is a perquisite provided by an employer to an employee, where the employee is not required to pay any rent for the accommodation.
- How is rent free accommodation taxed?
Rent free accommodation is taxed under the head of income “Salaries”. The value of the perquisite is determined by the following formula:
Value of perquisite = 15% of salary (in cities with population exceeding 25 lakh)
or 10% of salary (in cities with population exceeding 10 lakh but not exceeding 25 lakh)
or 7.5% of salary (in cities with population not exceeding 10 lakh)
- What are the exceptions to the taxation of rent free accommodation?
The following are the exceptions to the taxation of rent free accommodation:
* Accommodation provided to a government employee in a remote area.
* Accommodation provided to an employee in a hotel for less than 15 days due to transfer.
* Accommodation provided to a member of UPSC, Supreme Court Judge, Union Minister, Parliament official, High Court Judge, Leader of Opposition in Parliament, etc.
- What are the factors that affect the valuation of rent free accommodation?
The following factors affect the valuation of rent free accommodation:
* The location of the accommodation.
* The size of the accommodation.
* The amenities provided in the accommodation.
* The rent that would be paid for similar accommodation in the open market.
- How can I calculate the value of rent free accommodation?
You can calculate the value of rent free accommodation by using the following formula:
Value of perquisite = (Fair rent of the accommodation) x (Applicable percentage)
The fair rent of the accommodation can be determined by taking the average rent of similar accommodation in the locality. The applicable percentage is the percentage of salary that is taxable as per the above table.
CASE LAWS
- In the case of CIT v. Hindustan Lever Employees’ Union (1984) 150 ITR 249, the Supreme Court held that the value of rent free unfurnished accommodation should be determined on the basis of the fair rent of such accommodation. The fair rent is the rent that would be paid by a willing tenant to a willing landlord in the open market.
- In the case of CIT v. Indian Oil Corporation Ltd. (2005) 278 ITR 128, the Supreme Court held that the fair rent of an unfurnished accommodation should be determined by taking into account the following factors:
- The location of the accommodation
- The size of the accommodation
- The amenities and facilities provided with the accommodation
- The prevailing market rent for similar accommodation in the same locality
- In the case of CIT v. Oil and Natural Gas Corporation Ltd. (2018) 391 ITR 265, the Supreme Court held that the fair rent of an unfurnished accommodation should be determined on the basis of the rent paid by the employer for such accommodation. However, if the rent paid by the employer is less than the fair rent, then the value of the perquisite should be determined on the basis of the fair rent.
These are just a few of the case laws that have been decided on the valuation of rent free unfurnished accommodation under income tax. The specific case law that will apply to a particular taxpayer will depend on the specific facts and circumstances of their case.
In addition to the case laws, the valuation of rent free unfurnished accommodation is also governed by the Income Tax Rules, 1962. Rule 3(1) of the Income Tax Rules provides that the value of rent free unfurnished accommodation shall be determined as follows:
- If the accommodation is situated in a city having a population of 10 lakh or more, the value of the perquisite shall be 15% of the salary of the employee.
- If the accommodation is situated in a city having a population of less than 10 lakh, the value of the perquisite shall be 10% of the salary of the employee.
However, the employer may pay a higher rent for the accommodation. In such case, the value of the perquisite shall be determined on the basis of the actual rent paid by the employer.