New Income Tax Rules for rent-free accommodation

New Income Tax Rules for rent-free accommodation: The income tax department has revised its guidelines for valuing such perks, allowing employees who earn high salaries and receive rent-free accommodation from their employers to save more and receive higher take-home pay. On August 18, the Central Board of Direct Taxes (CBDT) announced changes to the Income Tax Rules for valuing benefits provided to employees in the form of rent-free or discounted housing from their employers. Beginning on September 1, the regulations will be in effect.

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The value of rent-free or discounted housing provided to an employee by his employer was changed for the purposes of calculating “perquisite” under the Finance Act of 2023. The perquisites calculation guidelines have now been announced. “The categorization and the limits of cities and population have now been based on the 2011 census as against the 2001 census earlier,” the income tax department said in a statement.

The Central Board of Direct Taxes (CBDT) has notified the amendments to the Income Tax Rules, bringing about these changes. The modifications concern the valuation of unfurnished accommodations that are owned by employers and offered to employees outside the central or state government sector.

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According to the revised notification, the valuation for such accommodations will be as follows:

In cities with a population exceeding 40 lakh according to the 2011 census, the valuation will be 10% of the salary, reduced from the earlier 15%.
In cities with a population exceeding 15 lakh but not surpassing 40 lakh as per the 2011 census, the valuation will be 7.5% of the salary, down from the prévious 10%.

The Rule has also been further rationalized in order to determine a fair tax consequence of an employee occupying the same space for more than one prior year.

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Employees who receive housing benefits from their employers in addition to high salaries will be able to save more money because the new rates will result in a smaller taxable base for them. The take-home pay for them will increase as a result of the lower perquisite value.

These provisions incorporate the insights 2011 census data and aim to rationalise the perquisite value calculation. Employees enjoying rent-free accommodation would see rationalisation of perquisite value leading to a reduction in taxable salary, increasing the net take-home pay.

It is worth noting that the reduction in the perquisite value of rent-free accommodations will yield dual implications: on the one hand, it will generate tangible savings for employees, while on the other hand, it will result in a corresponding decrease in government revenue. This modification will result in disproportionate benefits for higher-earning workers who are given expensive accommodations. Employees with lower incomes who live in more modest accommodations might not get a lot of tax relief.

Additionally, if corporate employers can take advantage of tax benefits for their workforce, this shift may prompt them to strategically review and possibly reshape their current compensation frameworks.