Updated Income Tax Regulations Offer Tax Benefits to Employees with Accommodation Provided Free of Rent

High-earning employees who receive rent-free accommodation from their employers are set to enjoy increased savings and a larger take-home salary. The income tax department has updated its valuation guidelines for such accommodations. 

The Central Board of Direct Taxes (CBDT) has introduced amendments to the Income Tax Rules, which will be effective from September 1.

According to the announcement, when unfurnished accommodations are given to employees who are not government employees at the central or state level, and these accommodations are owned by the employer, the valuation will be as follows: 

(i) In cities with a population exceeding 40 lakhs as per the 2011 census (previously, 25 lakhs as per the 2001 census), the valuation will be 10% of the salary (down from 15%).

(ii) In cities with a population exceeding 15 lakhs but not surpassing 40 lakhs as per the 2011 census (earlier, 10 lakhs but not exceeding 25 lakhs as per the 2001 census), the valuation will be 7.5% of the salary (reduced from 10%).

Amit Maheshwari, a Tax Partner at AKM Global, mentioned that employees with good salaries and employer-provided accommodation will save more money. This is because their taxable amount will decrease due to the new lower rates. This change will result in a smaller perquisite value, offering them relief in the form of higher take-home pay.

Gaurav Mohan, the CEO of AMRG & Associates, explained that these new rules use data from the 2011 census and aim to make calculating perquisite value more reasonable.

For employees who get free accommodations from their employers, the perquisite value will be recalculated, which means their taxable salary will decrease. This will lead to more take-home pay. 

However, it's important to note that while this reduction in the value of free accommodations benefits employees by saving them money, it will also reduce the government's revenue," Mohan added.

He also mentioned that this alteration might result in unequal advantages, particularly favoring higher-income employees who get costly accommodations. On the other hand, employees with lower incomes and simpler accommodations might not see substantial tax benefits.

Additionally, this adjustment could encourage companies to reexamine and potentially adjust their current compensation structures, especially if they can make the most of tax benefits for their employees, Mohan added.

Also Read: Tax Authorities: Approximately 55 million individuals might have chosen the new income tax regime