Direct Tax Alert - Rule 3 of the IT Rules amended to calculate perquisite value of accommodation ben

Background

A residential accommodation provided by an employer for the use of its employees and their families, either free of cost or at a concessional rate, is a taxable perquisite in the hands of such employees under the Income Tax Act, 1961 (IT Act). The taxability of such benefit is governed by Section 17(2) of the Act read with Rule 3 of the Income Tax Rules, 1962 (IT Rules) and for the purpose of computing taxable value the accommodation benefit is divided into the following category:

• Rent-free accommodation is provided to an employee and
• Value of any rent concession offered to an employee

In an effort to establish uniformity in the valuation approach for determining the taxable value of the above-mentioned categories of accommodation benefits, the Finance Act 2023, introduced modifications to section 17(2) of the IT Act, which provides that the computation method for both perquisites – rent-free accommodation and rent concessions – shall be determined according to amended rules to be established for this purpose. Further, it was also clarified that an accommodation shall be considered to have been provided at a concessional rate when the perquisite value of the accommodation (as determined by the specified rules) exceeded the rent recovered from the employee. 

In light of the provisions as amended in the Finance Act 2023, the Central Board of Direct Taxes (CBDT) has issued a notification¹ amending Rule 3 of the IT Rules (Amended Rule), by providing an updated method for the computation of perquisite value of rent-free accommodations.  

The Amended Rule continues to follow the same approach to value accommodation benefits as a percentage of the salary of the employee but at a reduced rate. The valuation in respect of employer-owned accommodation in remote areas is rationalised. The Amended Rule also ensures that there is no artificial rise in the value of accommodation on a year-to-year basis due to an increase in salary of the employee and any such increase is limited to the inflation level in the country.

Comparison between the Old Rule and Amended Rule

Circumstances	Valuation as per Old Rule	Valuation as per Amended Rule
Where unfurnished accommodation is provided by the Central Government or any State Government to the employees either holding office or post in connection with the affairs of the Union of such State	The license fee is determined by the Central Government or any State Government in respect of accommodation in accordance with the rules framed by such Government as reduced by the rent paid by the employee	No change
Where unfurnished accommodation is provided by any other employer:   (a) Employer-Owned	i) 15% of salary in cities having a population exceeding 2.5mn as per the 2001 census	i) 10% of salary in cities having a population exceeding 4mn as per 2011 census
	ii) 10% of salary in cities having a population exceeding 1mn but not exceeding 2.5mn as per 2001 census	ii) 7.5% of salary in cities having a population exceeding 1.5mn but not exceeding 4mn as per 2011 census
	iii) 7.5% of salary in other areas, in respect of the period during which the said accommodation was occupied by the employee during the previous year as reduced by the rent, if any, actually paid by the employee.	iii) 5% of salary in other areas, in respect of the period during which the said accommodation was occupied by the employee during the previous year as reduced by the rent, if any, actually paid by the employee.
(b) Employer -  Leased/Rented	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	Actual amount of lease rental paid or payable by the employer or 10% of salary, whichever is lower, as reduced by the rent, if any, actually paid by the employee.
Where furnished accommodation is provided by any other employer:	The value of perquisite as determined in case of unfurnished accommodation increased by 10% per annum of the cost of furniture  (including television sets, radio sets, refrigerators, other household appliances, air-conditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, by the actual hire charges payable for the same as reduced by any charges paid or payable for the same by the employee during the previous year.	No change
Where Hotel accommodation is provided by any other employer:	24% of salary paid or payable for the previous year or the actual charges paid or payable to such hotel, which is lower, for the period during which such accommodation is provided as reduced by the rent, if any, actually paid or payable by the employee	No change

 

Other Updates

1. Updates in Rule for Accommodation Provided in Specified Area

• Under the current regulations, employees who receive accommodation at specific work sites like mining sites, on-shore oil exploration sites, project execution sites, dam sites, power generation sites, or off-shore sites are not subjected to perquisite valuation. Initially, this exemption applied if the accommodation's plinth area was within 800 sq. ft. and it was located at least eight kilometres away from municipal or cantonment boundaries, or if it was situated in a remote area.
  However, the Amended Rule for rent-free accommodation has expanded the qualifying plinth area from 800 to 1000 sq. ft. for such accommodations.
   
• Furthermore, the Amended Rule has also brought changes to the definition of a ‘remote area’. Previously, this referred to an area at least 40 kilometres away from a town with a population of fewer than 20,000 based on the latest all-India census. In the revised definition, a ‘remote area’ now encompasses regions outside local limits or those located at a distance of 30 kilometres, measured aerially, from the boundaries of a municipality or cantonment board that houses a population of 100,000 or more, according to the 2011 census.

2. Updates in the Rule for Accommodation Provided for more than one year

• If an employee continues to be provided with the same accommodation for more than one year, the Amended Rule has inserted a cap in case of a furnished or unfurnished accommodation to ensure that the valuation for subsequent years does not exceed the valuation of the first year adjusted by the Cost Inflation Index. Where, the ‘first year’ means the Fiscal year (FY) 2023-2024, or the FY in which the accommodation was provided to the employee, whichever is later.
   
• Thus, the perquisite value of rent-free accommodation in the subsequent year shall be lower of the following:
  • Perquisite value computed as per the above rules; or
  • First year’s perquisite value as adjusted by the Cost Inflation Index (CII).

The formula prescribed for this purpose is as follows:

First year’s perquisite value × CII of the subsequent year / CII of the first year

BDO in India Comments:

The employers should consider the revised rule to calculate the perquisite value of accommodation benefits while calculating tax deductions at source from 1 September 2023, onwards. The perquisite value of accommodation for FY 2023-24 shall have an impact on the perquisite value to be calculated for FY 2024-25 and onwards. The payroll systems are to be updated with the amended valuation rule.

 

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¹ Notification No.65/2023, dated 18 August 2023 read with corrigendum issued vide Notification No. 72/2023, dated 29 August 2023.