CBDT notifies rules for valuing rent-free homes provided by employers

Employees drawing substantial salaries and having rent-free accommodation provided by their employers will now be able to save more and get a higher take-home salary as the income tax department has revised norms for valuing such perquisites.

The Central Board of Direct Taxes (CBDT) on August 18 notified amendments to the Income Tax Rules for valuing perquisites of rent-free or concessional accommodation by employers to employees. The rules will come into effect from September 1.

The Finance Act, 2023, had brought in an amendment for the purposes of calculation of 'perquisite' with regard to the value of rent-free or concessional accommodation provided to an employee, by his employer. The rules for calculating perquisites have been notified now.

"The categorisation and the limits of cities and population have now been based on the 2011 census as against the 2001 census earlier," the income tax department said in a statement on Saturday.

As per the notification, where unfurnished accommodation is provided to private sector employees and such accommodation is owned by the employer then the revised limits of population are more than 40 lakh (in place of 25 lakh), between 15 lakh to 40 lakh (in place of 10 lakh), and lastly less than 15 lakh (earlier less than 10 lakh).

The earlier perquisite rates of 15 per cent, 10 per cent and 7.5 per cent of the salary have now been reduced to 10 per cent, 7.5 per cent and 5 per cent of the salary respectively in the amended Rule.

The Rule has also been further rationalised so as to compute a fair tax implication of the same accommodation being occupied by an employee for more than one previous year.

AKM Global Tax Partner Amit Maheshwari said employees who are drawing substantial salaries and receiving accommodation from the employer will be able to save more since their taxable base is going to be reduced now with the revised rates. "The perquisite value shall be lower resulting in relief to them in the form of take-home pay."

AMRG & Associates CEO Gaurav Mohan said these provisions incorporate the insights 2011 census data and aim to rationalise the perquisite value calculation.

"Employees enjoying rent-free accommodation would see rationalisation 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," Mohan said.

He further said 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, Mohan added.