The term “accommodation” refers to a location or area where people reside. It can include all kinds of housing and living arrangements, from short-term lodging to long-term residencies. For housing to be taxable as perquisites, it must be offered as a component of an employment benefit plan. Accommodations made to assist employees in carrying out their official tasks are not taxable.
A home that the business provides to an employee and their family to live in is referred to as rent-free housing. Free or discounted accommodation with no rent may be made available. The Income Tax Act considers rent-free housing to be a benefit or non-cash element of an employee’s compensation that is provided by the employer.
Employees who live in a home that is provided to them rent-free by their employers are required under the Income Tax Act, 1961 to pay tax on the Rent Free Accommodation (RFA). This is so that the Income Tax Act can be followed, which states that rent-free housing is a perk provided to an employee by an employer and is subject to taxation under the income head “Salaries.”
There are two forms of rent-free housing provided by the federal government, state governments, the private sector, and other organisations:
• Furnished Rent-Free Accommodation
• Unfurnished Rent-Free Accommodation
The following factors must be taken into account in order to determine the value of rent-free housing offered by an employer to an employee:
The guidelines for valuing rent-free housing offered by businesses to employees as of August 18, 2023 have been published by the Central Board of Direct Taxes (CBDT), notification number G.S.R. 615(E). The Income Tax (Eighteenth Amendment) Rules, 2023, are the official name of these regulations. The guidelines came to effect from the first day of September 2023.
A brief understanding of the guidelines can be made as follows;
Accommodation is Unfurnished– License fee determined by the Central Government or any State Government in respect of accommodation in accordance with the rules framed by such Government
Accommodation is furnished– The value of perquisite as determined under column (3) and increased by 10% per annum of the cost of furniture 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.
Accommodation is unfurnished–
(i) 10% of salary in cities having population exceeding 40 lakhs as per 2011 census;
(ii) 7.5% of salary in cities having population exceeding 15 lakhs but not exceeding 40 lakhs as per 2011 census;
(iii) 5% of salary in other areas, in respect of the period during which the said accommodation was occupied by the employee
Accommodation is furnished – The value of perquisite as determined under column (3) and increased by 10% per annum of the cost of furniture 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.
Accommodation is unfurnished- 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.
Accommodation is furnished- The value of perquisite as determined under column (3) and increased by 10% per annum of the cost of furniture 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.
Accommodation is unfurnished– Not applicable
Accommodation is furnished– 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.
It is crucial that both employers and employees are aware of the tax repercussions and reporting requirements related to housing given by an employer free of charge. It is recommended to seek advice from tax experts or accountants who are acquainted with local legislation because failure to comply with tax laws can lead to fines and legal problems.
Offering perquisites to employees, such as accommodations, have various advantages for both employers and employees. These perks may improve job satisfaction, employee health, and overall business success.
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