Many companies provide accommodation to their employees, which is either rent free or has subsidized rent.
Such accommodation is considered a perquisite (commonly known as perk), and is taxed in the hands of the employee.
So, what is the value of this perk? What is the income tax on it? How is the tax calculated? Read on…
[This article has been inspired by queries from readers Ravi and Partha]
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In order to make the employees’ lives easier, many companies provide rent-free houses for their stay. Some companies pay the rent partially, while you as an employee pay the balance. The house can be owned by the company, or the company can rent / lease it from someone and provide it to you for your stay. |
Although getting a rent free house (or a concession in house rent) from your company can be a really good, it has implications on your income tax.
Such accommodation is treated as a perquisite (or perk), and is taxed in the hands of the employee – that is, you as an employee are liable to pay income tax on the perquisite value of the house.
What is the logic behind this? Why should you pay tax on this house?
Well, the company does incur a cost on this free / subsidised home, and the cost is directly attributable to you. That is, the company bears the cost directly and only for you when it provides a house to you.
Thus, we can say that instead of paying you in cash, the company is indirectly paying this amount to you through a rent free or subsidized house.
Thus, in a way, it is your income and you should be paying income tax on it. See – it is not that illogical, after all!
Note: Most private companies also include the value of this accommodation in your Cost-To-Company (CTC) pay. So, for all practical purposes, an employer provided house is indeed a part of your salary!
How much is the perquisite value of the house?
This depends on various factors:
- Whether the house is owned by the company or rented / leased by it
- Your salary
- Lease amount / rent paid by the company, if applicable
- Rent paid by you, if applicable
- Whether the house is furnished or not
Let’s understand the calculation of the perquisite value of a house better.
Meaning of Salary
For calculating the perquisite value of a house, salary would mean:
- Basic
- Dearness Allowance (DA)
- Any Bonus
- Any Commission
- Any Other Fees
- Any Other taxable allowances and payments
Meaning of Furnished House
The perk value of a house increases if it is furnished. By furnished, it means that it has one or more of the following:
- Television (TV)
- Refrigerator
- Air Conditioner (AC)
- Other household appliances
Case I: House Owned by the Company
If your employer provides you accommodation that is owned by it, the perquisite value of the house would be:
15% of salary (in cities that have a population exceeding 25 Lakhs as per the 2001 census)
OR
10% of salary (in cities that have a population between 10 Lakhs and 25 Lakhs as per the 2001 census)
OR
7.5% of salary (in all other places)
Less
The portion of the rent actually paid by you
For a furnished house, add to the above calculated value:
- 10% of the original cost of the furniture (if the furnishings are owned by the employer)
OR
- The actual hire / lease charges paid by the employer (if the furnishings are hired by the employer)
Example
Let’s assume that your basic is Rs. 8,000 per month, and DA is Rs. 4,000. You get a bonus of Rs. 25,000 every year.
You stay in a company provided quarters in Mumbai (population > 25 Lakhs), which is furnished. The furnishings were bought by the company for Rs. 40,000.
You are paying a rent of Rs. 2,000 every month. What would be the perquisite value of the house in this case?
Here, your monthly salary is Rs. 8,000 + Rs. 4,000 = Rs. 12,000 per month.
Yearly salary = Rs. 12,000 * 12 plus bonus of Rs. 25,000 = Rs. 1,69,000.
The rent paid by you over the year = Rs. 2,000 * 12 = Rs. 24,000.
Thus, perk value = 15% of Rs. 1,69,000 – Rs. 24,000 = Rs. 25,350 – Rs. 24,000 = Rs. 1,350.
Since the house is furnished, you would need to add 10% of the value of the furniture.
Thus, total perquisite value of the house = Rs. 1,350 + 10% of Rs. 40,000 = Rs. 5,350.
Case II: House Leased by the Company
If your employer provides you accommodation that is in turn rented / leased by it, the perquisite value of the house would be:
The lower of: The actual amount of lease or rent paid by the employer OR 15% of salary
Less
The portion of the rent actually paid by you
Also, for a furnished house, add to the above calculated value:
- 10% of the original cost of the furniture (if the furnishings are owned by the employer)
OR
- The actual hire / lease charges paid by the employer (if the furnishings are hired by the employer)
Please note that when the house is rented by the employer, the city in which it is located would not matter in the calculation of its perquisite value.
Example
Let’s again assume that your basic is Rs. 8,000 per month, and DA is Rs. 4,000. You get a bonus of Rs. 25,000 every year.
You stay in a company provided house, which is furnished. The company has taken the house on rent for Rs. 5,000 per month, and the furnishings are leased by the company for Rs. 1,000 per month.
You are paying a rent of Rs. 2,000 every month. What would be the perquisite value of the house in this case?
Here, your monthly salary is Rs. 8,000 + Rs. 4,000 = Rs. 12,000 per month.
Yearly salary = Rs. 12,000 * 12 plus bonus of Rs. 25,000 = Rs. 1,69,000.
The rent paid by you over the year = Rs. 2,000 * 12 = Rs. 24,000.
The rent paid by the company over the year = Rs. 5,000 * 12 = Rs. 60,000.
Thus, perk value = Lower of (Rs. 60,000 or 15% of Rs. 1,69,000) less Rs. 24,000 (rent paid).
That is, lower of Rs. 60,000 and Rs. 25,350, less Rs. 24,000.
Thus, perquisite value = Rs. 25,350 – 24,000 = Rs. 1,350.
Since the house is furnished, you would need to add the rent paid for the furniture as well.
Thus, total perquisite value of the house = Rs. 1,350 + (Rs. 1,000 * 12) = Rs. 13,350.
How is the perquisite value of house taxed?
The perquisite value of house arrived at using the above calculations is added to your income under the head “Income from Salaries”, and is taxed as per the prevailing income tax slabs.
(To find out the current IT slabs, please read “Income Tax (IT) Slabs / Brackets and Rates”)
Points to note
Living in the house does not matter
The company provided accommodation is taxable as a perquisite even if you do not actually occupy it. Thus, even if you do not live in the house allotted to you, it would be considered as your perk, and you would need to pay income tax on it.
Hotel accommodation is included
Even if the accommodation is provided in a hotel, it would be considered as a perk. However, if the hotel accommodation is provided for 15 days or less at the time of transfer from one place to another, it would not be considered a perquisite.
For hotels, perquisite value would be:
Lower of: 24% of the salary OR the actual amount paid to the hotel
Less
The rent actually paid by you
Government employees
If you are a government employee, the perquisite value of the house would be the license fee charged for such accommodation, less any rent actually paid by you.
Exceptions to this rule
Certain accommodations, if provided in a “remote area”, are not considered as perquisites. These include mining sites, dam sites, power generation sites, oil exploration sites, project execution sites, etc.
Other articles you might be interested in:
- How much should you invest to save income tax?
- Calculating your income tax liability – first step to saving tax
- Reached Section 80C limit? You can still save more income tax!
- Deduction of expenses on medical treatment – Section 80DDB
- Are you disabled? Save income tax under section 80U
- Deduction for rent paid – Section 80GG
- LIC launches “Jeevan Varsha” – Close Ended Money Back Plan with guaranteed additions
- Fixed Deposits (FD) for saving income tax through section 80C
- Tata Capital Debenture Issue – A review
- Make donations, save income tax – Section 80G
- Income Tax (IT) Slabs / Brackets – FY 2008-09 AY 2009-10
- Have a disabled dependent? Save income tax using section 80DD
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In the Case II (House Leased by the Company) if all the rent is deducted from my salary, then perquisite value will be zero. Therefore in this case their is no difference in HRA and CLA. Am I right?
Hi Gunjan,
It may or may not be – it depends on the other variables involved in their calculation, like your salary, the city you live in, etc.
Please check out the article “Income Tax (IT) treatment of House Rent Allowance (HRA)” for more on HRA exemption.
Hi Basavraj,
It should be calculated only for the period during which you availed company provided accommodation.
Hi
Please let me know whether CLA perk should be calculated on monthly basis or annual basis. If an employee is in CLA only for three months then how to calculate the CLA perk.
Thanks in advance
Basavaraj
You indicated that there are 3 different slabs of 15%, 10% and 7.5% for calculating perk value of company owned accomodation as per the population. Whereas for accomodation leased by company for employees, ther is only one flat slab of 15% irrespective of population. Why is this difference in treatment?
In your Case II example for calculating perk value of leased accomodation provided by employer, there is a mistake. Since the person is alos paying a rent of Rs 2,000 pm, an amount of Rs 24,000 has to be deducted from perk value. Thus the correct perk value will be Rs 37,350 -Rs 24,000 = Rs 13,350 ONLY.
I am an employee of PSU and retiring in Oct 09. I am residing in quarters provided by my employer. For the purpose of house perquisites, my employer is considering the payments made during the year in respect of existing employees. However, for the separated employees, final settlements made by way of gratuity (above the exempted limit of Rs.3.50 lakhs) EL encashment (above rs. 3 lakhs) and the entire emount of HPL encashment are also added and perquisite tax is calculated which is causing a great burden to the separated employees in the year of separation. I would like to know whether such final settlements made after cession of employment is justified to be included for calculating the house perquisites. It may be noted that if I do not vacate the house immediately after the retirement, my gratuity and leave encashment (say rs.17 lakhs) will not be settled, till I vacate the house. Thus I tend to lose income by way of interest on this rs.17 lakhs. Shall be grateful for your views.
Hi Sanjay,
If the house is leased by the company, the lease amount would take care of the city – a larger city would obviously have a higher lease, and a small town would have a lower lease.
And since the perk value is the “lower” of actual lease and 15% of salary, this 15% is only the upper limit of the perk value.
Hi Sanjay,
Thanks for pointing out the error. However, the calculation would be a little different from what you have indicated.
I have updated the article. Thanks again…
Hi Srinivasa,
Maybe I am misunderstanding, but what your company is doing seems right to me…
Is perquisite tax calculated on the amount, or regular income tax? I guess it would be regular income tax as the amounts are above the exemption limit…
I live in a accomadation provided by my company in a mining site & also less than 800sq ft plinth area but does not covered under remote area definition.I want to whether i am exempted from perquste tax on free housing
Hi Santosh,
If you are given an accommodation at a project site, and it is temporary in nature, it would be tax free.
I am working for a public sector bank. I have been provided unfurnished free accomodation by the employer. My remineration consists of Basic+D.A.+CCA(City compensatory allowance). while calcualting perk on CCA is also being clubbed as part of salary. The calculation is like this- (Basic+D.A.+CCA)*15% Minus STD Rent Paid. Is this correct. My doubt is in addition of CCA.
Dear Sir,
I have 65Lac CTC Salary and Company provided me flat in mumbai rent @66,000/-pm , please let me guide TDS on Salary as well Perquiste Tax.
I will be highly oblige if you will send me salary & perquisite tax calculator.
i am staying in company own unfurnished accomodation in mumbai. I have gross sal of 7.8 lacs p.a(excluding HRA). Since i am staying in co’s own accomodation, the company deducts HRA of 15000/-p.m which is otherwise payabe to me. The co. has valued perks as 117000/-p.a Is it correct? I feel perks value should be 117000/- less rent paid by me(i.e.the HRA component deducted) of Rs.180000/-. Please suggest if i am correct?
i am staying in company own unfurnished accomodation in mumbai. I have gross sal of 7.8 lacs p.a(excluding HRA). Since i am staying in co’s own accomodation, the company deducts HRA of 15000/-p.m which is otherwise payabe to me. The co. has valued perks as 117000/-p.a Is it correct? I feel perks value should be 117000/- less rent paid by me(i.e.the HRA component deducted) of Rs.180000/-. Please suggest if i am correct?
In the Case II (House Leased by the Company) if all the rent is deducted from my salary, then perquisite value will be zero. Am I right?
Where can i find confirmation of my above understanding.
I work in PSU Power Sector (Damodar Valley Corporation). I reside in Quarter provided by the employer. But the Quarters are of 50 or more years old and less than 800 Sq feet of plinth area. Perquisite tax on that accommodation which is very old is required?
My company has provided me a Company leased accomodation at Rs 20,000 per month and is paying the landlord directly. But, the co. is recovering the entire Rs 20,000 from my monthly salary of Rs 1,00,000. Kindly advise the perk value of CLA for tax purposes. Thanks. (No furniture, no other income like bonus, etc. House is in Delhi.)
Dear Sir,
I am living in Company Leased/Rented accommodation not owned by the company. Company is paying the rent directly to the owner. In my salary, I am having option for HRA and I am opting that HRA too. I have understood the perk value calculation and tax part. One doubt is that I am not paying any rent to owner but still I am showing HRA in my salary slip. I fall under Case II mentioned by you and in that rend paid by me is zero. In such case can I show rent slip for tax benefit? Please advice.