Valuing furnished rent-free accommodation of a non-government employee (as set, 1961 Act, AY 2017-18)

Where the value comes from

Rent-free accommodation given by an employer is a perquisite taxed under the head Salaries (section 17(2)(i)), and accommodation at a concessional rent is a perquisite as well (section 17(2)(ii)). The value of rent-free accommodation is prescribed by rule 3(1) of the Income-tax Rules, 1962 (Income-tax Rules, 1962, rule 3(1), Table I, as substituted by the Income-tax (13th Amendment) Rules, 2009, in force from assessment year 2010-11). The same scale for an employer other than the Central or a State Government is written into the Act itself, in the Explanations to section 17(2)(ii), which are held, and the steps below follow it.

Step 1: value of the accommodation unfurnished

• Owned by the employer: a set percentage of the employee's salary for the period he occupied it, fixed by the population of the city by the 2001 census (section 17(2)(ii), Explanation 1(a)(i) and Explanation 4): 15% where the population is above 25 lakh, 10% where it is above 10 lakh and up to 25 lakh, and 7.5% elsewhere.
• Taken on lease or rent by the employer: the lease rent the employer pays or is liable to pay, or 15% of salary, whichever is less (Explanation 1(a)(ii)).
• A hotel: 24% of the salary paid or payable for the year, or the charges paid or payable to the hotel, whichever is less, for the period of the stay; a hotel stay of not more than 15 days in all on transfer from one place to another is left out (Explanation 1(d)). This is the whole value: step 2 does not apply to a hotel.

Step 2: add the value of the furniture

For furnished accommodation owned or taken on lease by the employer, the value found in step 1 is increased by the value of the furniture and fixtures for the period of occupation (Explanation 1(c)(i) and (ii)); hotel accommodation is valued under Explanation 1(d) alone, with no such addition. That value is 10% a year of the cost of the furniture, which includes television and radio sets, refrigerators, air-conditioners and other household appliances, where the employer owns it; where it is hired from a third party, it is the hire charges payable (Explanation 2). Any amount the employee pays or is liable to pay for the furniture reduces this figure.

Step 3: deduct what the employee pays

The rent the employee pays or is to pay is deducted. Only the balance is the taxable perquisite; if the employee pays as much as the value found, nothing is taxed (Explanation 1(a) and (c): a concession arises only where the value exceeds the rent recoverable).

Meaning of salary for the valuation

Salary here means pay, allowances, bonus and commission payable monthly or otherwise, and any other monetary payment by whatever name called, from one employer or more (Explanation 3). It leaves out dearness allowance or pay unless it counts for retirement benefits, the employer's contribution to the employee's provident fund, allowances that are exempt, the value of the perquisites specified in section 17(2), and any payment or expenditure the proviso to that clause specifically excludes. It is the salary for the period the accommodation was occupied.

Other points

1. The rule's provisos add two points that the Act's Explanations do not repeat (provisos to Income-tax Rules, 1962, rule 3(1)): where an employee on transfer keeps accommodation at both places, only the lower of the two values is taxed for the first 90 days and both after that; and nothing is valued for accommodation given at a mining site, an on-shore oil exploration site, a project execution site, a dam site, a power generation site or an off-shore site, if it is either temporary, with a plinth area of at most 800 square feet and at least 8 kilometres outside any municipality or cantonment board, or in a remote area.
2. Where the employer is the Central or a State Government, the licence fee fixed by that Government is used instead of the percentage scale (Explanation 1(b)); that case is outside this question.

Illustration. An employee in a city of 30 lakh people (2001 census) has a salary of ₹6,00,000 a year and lives the whole year in a flat owned by his employer, furnished with items costing ₹1,00,000, and pays ₹2,000 a month. Value: 15% of ₹6,00,000 = ₹90,000; add 10% of ₹1,00,000 = ₹10,000; less ₹24,000 paid; perquisite ₹76,000.