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"Tax Planning For Rent-Free Residential Accommodation"

 

The most significant changes made by the Finance Act, 2007 in respect of valuation of perquisites relate to the valuation of rent-free residential accommodation provided to the employees of the private sector.

Presently the rent-free residential accommodation (owned by the employer) would be valued as a perquisite @7.5% of the salary in case the accommodation is provided in cities having population upto 10 lakh as per 2001 census.

Likewise, for all those employees who have been provided such accommodation in cities having population in excess of 10 lakh but less than 25 lakh, the value of the perquisite would be @ 10  % of salary.

Finally, in case the accommodation is provided to the employees in cities with a population exceeding 25 lakh, the perquisite value would be 15% of salary.

In respect of rent- free residential accommodation which is taken on lease or on rent by the employers, the value of perquisite would be the actual amount of lease rental paid or payable by employer or 15 % of the salary, whichever is lower from this amount, the amount recovered would be deducted.

In case the accommodation is provided by the employer to the employee at a concessional rate then the perquisite value in the first case would be valued as per the above system of calculation and from the amount so arrived at, the amount recovered or received from the employee would be deducted and the balance amount would be the net value of perquisite.

Thus, big saving would be available from the tax payment by employee in respect of rent-free residential accommodation so enjoyed by him. Same way even the employees receiving residential accommodation at a concessional amount would benefit a lot.

If the employee is provided with furnished accommodation, then an additional amount equal to 10% of the original cost of the furniture, refrigerator, air-conditioner, television set, radio set, other household appliances, etc. has to be added.

Thus, an employee has to take into consideration the value of the perquisite in the form of residential accommodation and the alternative cost of financing the same if he were to rent a residential accommodation on his own and pay for it out of his salary.

Similarly, the extra amount involved in purchasing furniture has to be considered in relation to the amount of tax to be paid by the employee on the value of the perquisites so added for calculating the tax to be deducted at source. After comparing both options, the employee can judge for himself as to whether he should take the residential accommodation with furniture or without furniture.

The choice to be made by an employee for taking the perquisite in the form of rent-free accommodation would depend on the alternative accommodation for which the employer will have to provide extra salary to the employee for financing the same.

Thus where the house rent is cheap and the salary is high it would be profitable for an employee to take cash allowance instead of rent-free residential accommodation.

Where the accommodation is provided by the employer in a hotel (except where the employee is provided such accommodation for a period not exceeding in aggregate 15 days on his transfer from one place to another), then the perquisite value would be..

  1. 24°/o of the salary paid or payable, or
  2. the actual charges paid or payable to the hotel,
  3. whichever is lover,

for the period during which the accommodation is provided as reduced by the rent, if any, actually paid or payable by the employee.

This is, however, not applicable to any accommodation located in a ‘remote area’ provided to an employee working at a mining site or an onshore oil exploration site, or a project execution site or an accommodation provided in an offshore site of similar nature.

Also where the employee is provided with accommodation at the new place of posting on account of his transfer from one place to another, while retaining the accommodation at the other place, the value of perquisite shall be determined with reference to only one such accommodation which has the lower value with reference to the valuation of the accommodation as per Rule 3 for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both such accommodation.


Where a part of the rent-free residential accommodation is actually used for holding a meeting or conference or any other office work of the employer, the fair rental value of the premises should be suitably reduced

The Finance Act, 2007 has now clarified and explained the concept of rent-free accommodation or property at a concessional rent to the employee. The new detailed provisions are exactly in tune with the above mentioned provisions. Only they have been explained in a more lucid manner to avoid any litigation.
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