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Taxability of accommodation provided by employer

Let us take a look at the tax rules governing accommodation provided by the employer – both when the accommodation is owned by the employer and when accommodation is rented by the employer for the benefit of the employee. The term employer in this post refers to non-government employers. Please see the “Definitions” section in this post for the meaning of terms such as accommodation, furnishings, and salary, used in this post.

Rule 3 of the Income Tax Rules, which pertains to valuation of perquisites, provides guidelines on how to tax accommodation provided to employees.

Factors that determine taxability of accommodation provided to employees

According to Rule 3, the following factors determine the perquisite value of the accommodation.

1. Accommodation ownership – owned by the employer or rented by the employer.
2. Whether the accommodation is furnished.
3. Accommodation location – as per the population of the city/town in which the accommodation is located.

The perquisite values (the salary amount to be added to the taxable income) for employer-provided accommodation under different circumstances are as follows.

I. Employer owns the accommodation and the accommodation is unfurnished

i) The accommodation is located in a city with population of over 25 lakh (as per 2001 census).

The perquisite value shall be calculated as 15% of the employee salary as reduced by the rent, if any, actually paid by the employee.

ii) The accommodation is located in a city with population exceeding 10 lakh but not exceeding 25 lakh (as per 2001 census).

The perquisite value shall be calculated as 10% of the employee salary as reduced by the rent, if any, actually paid by the employee.

iii) The accommodation is located in a city with population less than or equal to 10 lakh (as per 2001 census).

The perquisite value shall be calculated as 7.5% of the employee salary as reduced by the rent, if any, actually paid by the employee.

II. Employer owns the accommodation and the accommodation is furnished

i) The accommodation is located in a city with population of over 25 lakh (as per 2001 census).

The perquisite value shall be calculated as 15% of the employee salary as reduced by the rent, if any, actually paid by the employee plus the annual value of the furnishings provided.

ii) The accommodation is located in a city with population exceeding 10 lakh but not exceeding 25 lakh (as per 2001 census).

The perquisite value shall be calculated as 10% of the employee salary as reduced by the rent, if any, actually paid by the employee plus the annual value of the furnishings provided.

iii) The accommodation is located in a city with population less than or equal to 10 lakh (as per 2001 census).

The perquisite value shall be calculated as 7.5% of the employee salary as reduced by the rent, if any, actually paid by the employee plus the annual value of the furnishings provided.

III. Employer rents/leases the accommodation and the accommodation is unfurnished

The perquisite value shall be the actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower, as reduced by the rent, if any, actually paid by the employee.

IV. Employer rents/leases the accommodation and the accommodation is furnished

The perquisite value shall be the actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower, as reduced by the rent, if any, actually paid by the employee plus the annual value of furnishings provided by the employer.

V. Accommodation provided in a hotel

In case an employee is provided accommodation in a hotel on account of transfer, the accommodation shall be tax-free for a period of 15 days (in total for the year). In any other case, the perquisite value shall be calculated as 24% of salary paid or payable for the year or the actual charges paid or payable to the hotel, whichever is lower, for the period during which such accommodation is provided minus the rent, if any, actually paid or payable by the employee.

VI. More than one accommodation, in case of transfer

When an employee is transferred from one location to another and the employer allows the employee to retain the accommodation in the previous location for the sake of employee convenience, the perquisite value shall be calculated for accommodations provided in both locations and the lower value of the two shall be taken as the perquisite value until a period of 90 days.

Beyond 90 days, the value of perquisite shall be charged for both accommodations (in the previous and the current locations).

The value of perquisite shall be calculated for the accommodations on the basis of the location of the accommodation, whether the accommodation is employer-owned or rented, and whether the accommodation is furnished.

VII. Temporary accommodation at project site

When an accommodation is provided to an employee at a project site (including locations such as a mining site, an on-shore oil exploration site, a dam site, a power generation site or an off-shore site), such an accommodation shall be tax-free, subject to the following condition.

1. The accommodation should be of temporary nature with a plinth area not exceeding 800 square feet and located not less than eight kilometres away from the local limits of any municipality or a cantonment board or
2. The accommodation should be located in a remote area.

Definitions

1. The term accommodation refers to a house, flat, farm house or part thereof, hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure.

2. The term salary refers to the gross salary of the employee after excluding components such as the employer’s contribution to Provident Fund and tax-free allowances. Please check Rule 3 of the Income Tax Rules for the exact definition of the term salary for the purpose of perquisite calculation.

3. Annual value of furnishings

The term furnishings refers to furniture and household appliances (including television sets, radio sets, refrigerators, other household appliances, air-conditioning plant or equipment or other similar appliances or gadgets).

If the furnishings are bought by the employer.
The annual value shall be calculated as 10% of the cost of furnishings.

If the furnishings are hired by the employer from a third party.
The annual value shall be the actual hire charges payable to the third party as reduced by any charges paid or payable for the same by the employee.

4. The term hotel refers to licensed accommodation in the nature of motel, service apartment or guest house.

5. The term remote area means an area that is located at least 40 kilometres away from a town having a population not exceeding 20,000 based on latest published all-India census.

Security deposit/rental advance paid by the employer

Is there is any tax implication with regard to the employer paying the security deposit/rental advance when the employer provides a rented accommodation to an employee? Should there be any perquisite calculation on the deposit/advance provided?

Rule 3 of the Income Tax Rules is silent on the issue of security deposit/rental advance paid by the employer. However, there are case laws in which the tax and judicial authorities have ruled that the security deposit/rental advance shall not be taxable.

ITA No. 6591/Mum/2014 (Assessment Year: 2010-11)
An investment advisory firm provided accommodation to one of its employees and as part of the same paid Rs 20 lakh as a deposit to the house owner. At the time of assessment, the assessing officer was of the view that the Rs 20 lakh deposit should be construed as a benefit, akin to an interest-free loan, in the hands of the employee. Further, the assessing officer applied a notional interest of 12% on the deposit and concluded that Rs 2.4 lakh (20% of Rs 20 lakh) should be added to the taxable income of the employee as perquisite. The case was taken up by the appellate tribunal and the tribunal ruled in favour of the assessee dismissing the Income Tax Department’s contention that the security deposit should be looked at as a loan. The tribunal based its verdict on an earlier case in which the High Court of Bombay adjudicated on Income Tax Appeal No.3516 of 2010 (COMMISSIONER OF INCOME TAX-26 Vs SHANKAR KRISHNAN).

The first paragraph of the Bombay High Court judgement takes the question head on.

Where an employer takes residential premises on rent by giving security deposit
for the benefit of employees, whether the notional interest on such security deposit
is liable to be included in the perquisite value of the accommodation given to the
assessee employee is the question raised in this appeal?

Paragraph 9 of the judgement provides the answer to the above question in no uncertain terms.

Thus, on a plain reading of Rule 3, it is seen that the perquisite value of the
residential accommodation provided by the employer is to be computed on actual
amount of lease rental paid or payable by the employer and not on notional basis.
Therefore, in our opinion, the contention of the revenue that the notional interest on
the deposits paid by the employer to the landlord has to be taken into consideration
while computing the perquisite value of the residential accommodation cannot be
accepted in view of the express words used in Rule 3 of the Income Tax Rules, 1962
as amended w.e.f. 1.4.01.