India’s Central Board of Direct Taxes (CBDT) on 18 August 2023 issued a notification amending the rules for determining the value of residential accommodations provided by an employer. The amended Rule 3 is applicable effective 1 September 2023.
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 the employees under the Income Tax Act, 1961 (IT Act). The taxability of that benefit is governed by Section 17(2) of the Act read with Rule 3 of the Income Tax Rules, 1962 (IT Rules). For purposes of computing taxable value, the accommodation benefit is divided into two categories:
- Rent-free accommodation provided to an employee; and
- The 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 these two 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 – will be determined according to amended rules to be established for this purpose. Further, it was also clarified that an accommodation will be considered to have been provided at a concessional rate when the perquisite value of the accommodation (as determined by the specified rules) exceeds the rent recovered from the employee.
In light of the provisions as amended in the Finance Act 2023, the CBDT has issued a notification amending Rule 3 of the IT Rules (the amended rule), by providing an updated method for the computation of perquisite value of rent-free accommodations.
The amended rule follows 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 increase in the value of accommodation on a year-to-year basis due to an increase in the employee’s salary and any such increase is limited to the inflation level in the country.
Comparison between the Old Rule and Amended Rule
Other Updates
1. Updates in Rule for Accommodation Provided in Specified Area
Under the current regulations, employees who receive accommodation at specific work sites such as 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 accommodations has expanded the qualifying plinth area from 800 to 1000 sq. ft. for such accommodations.
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 to the Rule for Accommodation Provided for more than one year
For employees who continue to be provided the same accommodation for more than one year, the amended rule has inserted a cap in the case of furnished or unfurnished accommodations to ensure that the valuation for subsequent years does not exceed the valuation of the first year adjusted by the Cost Inflation Index (CII). The “first year” means fiscal year 2023-2024, or the fiscal year in which the accommodation was provided to the employee, whichever is later.
Thus, the perquisite value of rent-free accommodation in the subsequent year will be the lower of the following:
- Perquisite value computed as per the above rules; or
- First year’s perquisite value as adjusted by the 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 Comments
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 will have an impact on the perquisite value to be calculated for FY 2024-25 and onwards. Payroll systems should be updated with the amended valuation rule.
Preeti Sharma
BDO in India