Due to the paucity of available accommodation and in order to attract the talent pool, many employers provide free accommodation or accommodation at concessional rent, to their employees. This is particularly true, in case of companies situated at remote places, where a person is normally not willing to move, unless proper accommodation is available to him. The employer sometimes also provides the facility of a gardener, sweeper, etc., at the accommodation provided to the employees. These facilities provided by an employer, are not tax-free in the hands of an employee. The tax laws have provisions for valuing such facilities, which are termed as ‘perquisites’ in income tax parlance. Let us discuss how this is done.
When do facilities provided by employers become taxable
It is interesting to note that these facilities become taxable in the hands of the employee, not only when they are provided to the employee, but also when such facilities are provided to any of the members of the employee’s household. For the purpose of taxation of provision of accommodation, the members of the household includes the spouse, children and parents, as well as spouses of the children, servants and dependents of the employee. So, any free accommodation provided to the parents of an employee, even at a place other than where the employee is working, will also become a perquisite and thus, become taxable. Accommodation for this purpose shall include, not only the residential house, but also a farm house, hotel, service apartment and guest houses.
Importantly, such facilities are taxable when they are provided to the employee directly by the employer and also when these are provided indirectly to him, due the reason of his employment. So, an accommodation provided to an employee by a company other than his employer, will also become taxable in the hands of the employee.
Facilities provided to the employee of the central and state government
The tax laws provide different treatment to these facilities, depending on whether the employee is a government employee or not and also depending on whether he is a central government or state government employee. For government employees, the value of such a perquisite shall be the license fee as is already fixed for such accommodation by the respective governments, if the accommodation is provided free to the employee. However, if any rent is recovered from the employee by the government, the taxable perquisite shall be reduced to the extent of the rent so recovered. The same treatment shall apply, whether the accommodation provided is owned by the employer or is taken on rent from a third party.
These rules apply only to the employees who are working for any of the government departments. Employees working for companies which are owned by the government, are not treated as government employees for this purpose. So, employees of public sector banks or other government companies, shall be treated separately. If the accommodation that is provided is furnished, the taxable perquisite shall be further increased by 10% of the cost of such furniture, including the value of refrigerator, other household appliances and air conditioners, etc. However, in case such items are taken on hire, then, the charges for such items shall be taken as the actual hire charges paid by the employer.
Facilities provided to non-government employees
The valuation of the perquisite for accommodation that is provided to a person who is not a government employee, would depend on whether the accommodation is owned by the employer or is taken on rent. If the accommodation is taken on rent, the actual cost incurred by the employer for such accommodation, subject to a maximum of 15 % of the salary as reduced by the rent, if any recovered, shall be treated as the value of the perquisite. However, in case the accommodation is owned by the employer, the valuation of such perquisites will depend on the population of the place of accommodation, as per the 2001 census and the salary of the employee.
So, in case the accommodation is situated in any place where the population was more than 25 lakhs, the value shall be taken at 15% of the salary of the employee. The value will go down to 10% of the salary, in case the population of the city is between 10 lakhs and 25 lakhs and will reduce further to 7.50% of the salary for rest of the places. Salary for this purpose, would include all the monthly emoluments paid, except the dearness allowance, unless the same forms part of the superannuation computation.
If the employee is transferred from one place to another and the employee is provided with accommodation at both places, the perquisite shall be taken for one place only for the first 90 days and thereafter, the value of perquisite for both the places shall be taxed, if the employee continues to retain both the accommodations.
The value of the perquisite for an accommodation provided in a hotel, shall be taken as nil, in case the accommodation is provided to the employee in connection with his transfer from one place to another, for a maximum period of 15 days. However, in other cases, the value of the perquisite shall be taken as the lower of 24% of the salary of the employee or the charges actually paid to the hotel for the period of his stay.
The rules for valuation of unfurnished accommodation provided to non-government employees, shall be the same as those applicable to government employees as discussed above. With respect to the facility of a sweeper, watchman, gardener or even a personal attendant, the actual salary paid to such person, shall be the value of the perquisite for both government employees, as well as non-government employees.
(The author is a tax and investment expert, with 35 years’ experience)