Tax on your rent

Rajesh S

"All I want is a room somewhere, far away from the cold night air..." goes a popular song. It’s true that housing is one of the most basic needs of an individual. Given that there’s no place like home, employers offer accommodation assistance to employees to attract and retain the right talent. The assistance is either in the form of rent-free or concessional accommodation, or a house rent allowance.

Unfortunately for employees, the Indian income tax laws consider both these options as taxable employee benefits. To make matters a little more complicated there are differing rules for taxing these benefits, leaving employees baffled while selecting the most tax efficient option. We take a look at the tax implications of both these options, in order to help you make a more informed decision.

Employer-provided rent free accommodation

Rent free accommodation (furnished or unfurnished) provided by the employer is taxable in your hands. Under Rule 3 of the Income Tax Rules, 1962 (Rules), there are separate norms for computing the taxable value for government and non-government employees. The taxable value has been determined in different situations as follows:

• For government employees, the licence fee determined by the government is the taxable value

• For non-government employees, if the employer has taken the accommodation on lease, the taxable value is the lower of 15% of your salary or actual lease rent paid/payable by your employer

• In case the accommodation is owned by your employer, the taxable value will be determined in the following manner:

a) 15% of your salary (if you live in a city with a population of over 25 lakh according to the 2001 census figures)

b) 10% of your salary (if you live in a city with a population of over 10 lakh but below 25 lakh according to the 2001 census figures)

c) 7.5% of salary in other areas The term “salary” considered for valuation includes basic pay, bonus, commission, any monetary payment and all taxable allowances but does not include perquisites and employer’s provident fund contribution. The salary is considered for the period for which the accommodation benefit was provided to you. In all the above cases, the amount, if any, paid by the employee shall be reduced from the taxable value.

There is a tax cost if you get a furnishing allowance or a furnished apartment. In case your employer provides furnishings in the accommodation provided (furnishings include television set, household appliances, etc) 10% per annum of the cost of furnishing (if the same is owned by your employer) or actual hire charges payable will be added to the taxable value of the accommodation determined above.

House rent allowance

The employer may choose to provide a house rent allowance (HRA) instead of a rent-free or concessional accommodation. The HRA would be taxable in your hands. However, you are entitled to an exemption provided you make an actual rental payment. The least of the following three calculations is the exemption available on the HRA:

• Actual HRA received (for the period during which rented accommodation was occupied by you)

• Actual rent paid minus 10% of salary

• 50% of salary in the four metros (40% of salary in other cities)

Salary in this context means only the base salary, dearness allowance (if terms of employment so provide) and commission, if any, based on a fixed percentage of turnover.

Let us use an example to explain this. Rajeev, working in a private sector company in a non-metro, is provided furnished accommodation by his employer. Rajeev’s salary includes a basic salary of Rs 10 lakh, other taxable allowances of Rs 4 lakh and bonus of Rs 5 lakh. His employer pays a rent of Rs 2.4 lakh (Rs 20,000 per month) for his accommodation.

Now let us assume that instead of furnished accommodation, Rajeev is given an HRA of Rs 2.4 lakh per annum (Rs 20,000 per month). The rent paid by him is Rs 2.4 lakh. As can be seen from the computation in the table above, HRA is generally more tax efficient than rent-free accommodation. This is because bonus and other taxable allowances do not form part of salary for computing HRA exemption. This is true when the HRA received is more or less equal to the rent paid for accommodation. Further, HRA increases your net take home pay.

If the employer pays the housing deposit on your behalf under the HRA arrangement, the same can be considered as an interest-free loan provided to you and a notional interest perquisite (based on State Bank of India rates) would be considered in your hands.

So, which of these options is better? Unfortunately, there is no rule of thumb to determine which option is more tax beneficial. The taxability of both these benefits is dependent on various parameters like city, rent, type of accommodation and, most important, salary break up. Before deciding, you should carefully assess the merits and demerits of both of these options using the guidelines stated above.

Rajesh S is a senior tax professional with Ernst & Young, India