Valuation of Rent Free Accomodation provided to employee

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Rishu Goyal (Querist)
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19 July 2007 Please guide how the value of rent free accomodation provided to employee by the employer is to be made.

I came to know that the slab rates of 7.5%, 10% and 15% based of population of the city (upto 10lacs, 10-25 Lacs and above 25 Lacs) has been introduced by IT department with retrospective effect.

If it is so please provide me the copy of notification/ circular in this regard

SHIV KUMAR GUPTA

SHIV KUMAR GUPTA (Expert)
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19 July 2007 Section 17

Perquisites and its valuation

Valuation of perquisite under rule 3

Income chargeable under the head “Salaries” - (1) The following income shall be chargeable to income-tax under the head “Salaries”:

(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him.

(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

(2) For the removal of doubts, it is clarified that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due. Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “Salary”.

Definition of Salary

(3) “Salary” includes wages, fees, commissions, perquisites, profits in lieu of, or, in addition to salary, advance of salary, annuity or pension, gratuity, payments in respect of encashment of leave, etc. It also includes the annual accretion to the employee’s account in a recognized provident fund to the extent it is chargeable to tax under rule 6 of Part A of the Fourth Schedule of the Income-tax Act. Contributions made by the employer to the account of the employee in a recognized provident fund in excess of 12 per cent of the salary of the employee, along with interest applicable, shall be included in the income of the assessee for the previous year. Any contribution made by the Central Government to the account of the employee under the New Pension Scheme as notified vide Notification No. F.N. 5/7/2003-ECB&PR, dated 22-12-2003 (copy enclosed as Annexure VA) and referred to in section 80CCD [para 5.4(E) of this Circular] shall also be included in the salary income. Other items included in salary, profits in lieu of salary and perquisites are described in section 17 of the Income-tax Act. It may be noted that, since salary includes pensions, tax at source would have to be deducted from pension also, if otherwise called for. However, no tax is required to be deducted from the commuted portion of pension as explained in clause (3) of para 5.2 of this Circular.

(4) Section 17 defines the terms “salary”, “perquisite” and “profits in lieu of salary”.

Perquisite includes :—

(a) The value of rent free accommodation provided to the employee by his employer;

(b) The value of any concession in the matter of rent in respect of any accommodation provided to the employee by his employer;

(c) The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases :

(i) By a company to an employee who is a director of such company;

(ii) By a company to an employee who has a substantial interest in the company;

(iii) By an employer (including a company) to an employee, who is not covered by (i) or (ii) above and whose income under the head ‘Salaries’ (whether due from or paid or allowed by one or more employers), exclusive of the value of all benefits and amenities not provided by way of monetary payment, exceeds Rs. 50,000.

The rules relating to valuation of such benefits and amenities have been prescribed in rule 3. It is further provided that ‘profits in lieu of salary’ shall include amounts received in lump sum or otherwise, prior to employment or after cessation of employment for the purposes of taxation. The rules for valuation of perquisite are as under :—

I.
Accommodation - For purpose of valuation of the perquisite of unfurnished accommodation, all employees are divided into two categories: (i) Government & State Government employees; and (ii) Others.

For employees of the Central and State Government the value of perquisite shall be equal to the licence fee charged for such accommodation as reduced by the rent actually paid by the employee.

For all others, i.e., those salaried taxpayers not in employment of the Central Government and the State Government, the valuation of perquisite in respect of accommodation would be at prescribed rates, as discussed below :

(a) Where the accommodation provided to the employee is owned by the employer, the rate is 20 per cent of ‘salary’ in cities having population exceeding four lakh as per the 2001 census. For other places, the perquisite value would be 15 per cent of salary.

(b) Where the accommodation so provided is taken on lease/rent by the employer, the prescribed rate is 20 per cent of the salary or the actual amount of lease rental payable by the employer, whichever is lower, as reduced by any amount of rent paid by the employee.

For furnished accommodation, the value of perquisite as determined by the above method shall be increased by :—

(i) 10 per cent of the cost of furniture, appliances and equipments, or

(ii) where the furniture, appliances and equipments have been taken on hire, by the amount of actual hire charges payable.

- as reduced by any charges paid by the employee himself.

“Accommodation” includes a house, flat, farm house, hotel accommodation, motel, service apartment guest house, a caravan, mobile home, ship etc. However, the value of any accommodation provided to an employee working at a mining site or an on-shore oil exploration site or a project execution site or a dam site or a power generation site or an off-shore site will not be treated as a perquisite. However, such accommodation should either be located in a “remote area” or where it is not located in a “remote area”, the accommodation should be of a temporary nature having plinth area of not more than 800 square feet and should not be located within 8 kilometers of the local limits of any municipality or cantonment board. A project execution site for the purposes of this sub-rule means a site of project up to the stage of its commissioning. A “remote area” means an area located at least 40 kilometers away from a town having a population not exceeding 20,000 as per the latest published all-India census. Off-shore sites of similar nature do not have to meet any requirement of distance.

If an accommodation is provided by an employer in a hotel the value of the benefit in such a case shall be 24 per cent of the annual salary or the actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided as reduced by any rent actually paid or payable by the employee. However, where in cases the employee is provided such accommodation for a period not exceeding in aggregate fifteen days on transfer from one place to another, no perquisite value for such accommodation provided in a hotel shall be charged. It may be clarified that while services provided as an integral part of the accommodation, need not be valued separately as perquisite, any other services over and above that for which the employer makes payment or reimburses the employee shall be valued as a perquisite as per the residual clause. In other words, composite tariff for accommodation will be valued as per these Rules and any other charges for other facilities provided by the hotel will be separately valued under the residual clause. Also, if on account of an employee’s transfer from one place to another, the employee is provided with accommodation at the new place of posting while retaining the accommodation at the other place, the value of perquisite shall be determined with reference to only one such accommodation which has the lower value as per the table prescribed in rule 3 of the Income-tax Rules, for a period up to 90 days. However, after that the value of perquisite shall be charged for both accommodations as prescribed.

II.
Personal attendants, etc. - The value of free service of all personal attendants including a sweeper, gardener and a watchman is to be taken at actual cost to the employer. Where the attendant is provided at the residence of the employee, full cost will be taxed as perquisite in the hands of the employee irrespective of the degree of personal service rendered to him. Any amount paid by the employee for such facilities or services shall be reduced from the above amount.

III.
Gas, electricity & water - For free supply of gas, electricity and water for household consumption, the rules provide that the amount paid by the employer to the agency supplying the amenity shall be the value of perquisite. Where the supply is made from the employer’s own resources, the manufacturing cost per unit incurred by the employer would be taken for the valuation of perquisite. Any amount paid by the employee for such facilities or services shall be reduced from the above amount.

IV.
Free or concessional education - Perquisite on account of free or concessional education shall be valued in a manner assuming that such expenses are borne by the employee, and would cover cases where an employer is running, maintaining or directly or indirectly financing the educational institution. Any amount paid by the employee for such facilities or services shall be reduced from the above amount. However, where such educational institution itself is maintained and owned by the employer or where such free educational facilities are provided in any institution by reason of his being in employment of that employer, the value of the perquisite to the employee shall be determined with reference to the cost of such education in a similar institution in or near the locality if the cost of such education or such benefit per child exceeds Rs. 1,000 p.m.

V.
Interest free or concessional loans - It is common practice, particularly in financial institutions, to provide interest free or concessional loans to employees or any member of his household. The value of perquisite arising from such loans would be the excess of interest payable at prescribed interest rate over interest, if any, actually paid by the employee or any member of his household. The prescribed interest rate would now be the rate charged per annum by the State Bank of India as on the 1st day of the relevant financial year in respect of loans of the same type and for the same purpose advanced by it to the general public. Perquisite value would be calculated on the basis of the maximum outstanding monthly balance method. For valuing perquisites under this rule, any other method of calculation and adjustment otherwise adopted by the employer shall not be relevant.

However, small loans up to Rs. 20,000 in the aggregate are exempt. Loans for medical treatment specified in rule 3A are also exempt, provided the amount of loan for medical reimbursement is not reimbursed under any medical insurance scheme. Where any medical insurance reimbursement is received, the perquisite value at the prescribed rate shall be charged from the date of reimbursement on the amount reimbursed, but not repaid against the outstanding loan taken specifically for this purpose.

VI.
Use of assets - It is common practice for an asset owned by the employer to be used by the employee or any member of his household. This perquisite is to be charged at the rate of 10 per cent of the original cost of the asset as reduced by any charges recovered from the employee for such use. However, the use of Computers and Laptops would not give rise to any perquisite.

VII.
Transfer of assets - Often an employee or member of his household benefits from the transfer of movable asset (not being shares or securities) at no cost or at a cost less than its market value from the employer. The difference between the original cost of the movable asset (not being shares or securities) and the sum, if any, paid by the employee, shall be taken as the value of perquisite. In case of a movable asset, which has already been put to use, the original cost shall be reduced by a sum of 10 per cent of such original cost for every completed year of use of the asset. Owing to a higher degree of obsolescence, in case of computers and electronic gadgets, however, the value of perquisite shall be worked out by reducing 50 per cent of the actual cost by the reducing balance method for each completed year of use. Electronic gadgets in this case means data storage and handling devices like computer, digital diaries and printers. They do not include household appliance (i.e., white goods) like washing machines, microwave ovens, mixers, hot plates, ovens, etc. Similarly, in case of cars, the value of perquisite shall be worked out by reducing 20 per cent of its actual cost by the reducing balance method for each completed year of use.

VIII.
Employee Stock Option Plan - Prior to the Finance Act, 2000, stock options were taxed at two stages i.e., as perquisite (on the amount representing the difference between the exercise price and the fair market value on the date of exercise), and as capital gains at the time of transfer of the same. With effect from 1-4-2001 (relevant to assessment year 2001-02) onward, stock options issued as per guidelines of the Central Government are to be taxed only once, at the time of sale, as capital gains. In cases, where perquisite has been assessed with reference to exercise of the option by the employee under section 17(2), the fair market value at the time of exercise of the option shall be the cost of acquisition of share for working out the capital gains. The relevant guidelines of the Central Government have been issued vide Notification No. 1021(E), dated 11-10-2001. Stock options not in conformity with the above guidelines (non-qualified stock options) shall continue to be taxed at both the stages.

It is pertinent to mention that benefits specifically exempt under sections 10(13A), 10(5), 10(14), 17 etc. would continue to be exempt. These include benefits like travel on tour and transfer, leave travel, daily allowance to meet tour expenses as prescribed, medical facilities subject to conditions - Circular No. 11/2006, dated 16-11-2006.

List of hospitals recognised under Central Government Health Scheme

1. GOVT. HOSPITAL
PRIVATE HOSPITAL

Delhi
For maternity cases only

1. Dr. R.M.L. Hospital
1. Dr. B.L. Kapur Memorial Hospital, Pusa Road.

2. Safdarjang Hospital
2. St. Stephen’s Hospital, Tees Hazari.

3. Smt. Sucheta Kripalani Hospital (Only for maternity and for staff working in the Hospital)
3. Kasturba Hospital, Near Jama Masjid

4. CGHS Maternity and Gynae Hospital, R.K. Puram
4. Girdhari Lal Maternity Hospital, Opposite Kamla Market, Ajmeri Gate

5. CGHS Maternity Centre, Srinivaspuri
5. Delhi Neurological Research Centre (for CT Scan)

6. CGHS Maternity Centre, Kalkaji

For TB only

7. All Centres under New Delhi Municipal Committee (Only for Maternity cases)
6. Lala Ram Swaroop TB Hospital, Mehrauli.

8. All Centres under Municipal Corporation of Delhi (Only for Maternity cases)
7. Rajan Babu TB Hospital, Kingsway Camp.

For By-Pass Surgery

9. Badshah Khan Hospital, Faridabad
8. Escorts Heart Institute.

9. Batra Hospital.

10. Natural Heart Institute.

For General Cases

11. Narinder Mohan Hospital, Mohan Nagar, Ghaziabad.

2. Ahmedabad

1. Government Civil Hospital

2. Government Mental Hospital

3. Government TB Hospital

4. Government Dental Hospital

5. Sh. M.P. Shah Cancer Hospital (Government aided).

3. Allahabad

1. S.R.N. Hospital

2. M.L.N. Hospital

3. M.D. Eye Hospital

4. Dufferin Hospital

5. T.B. Sapru Hospital

6. Kamla Nehru Memorial Hospital

7. S.N. Children Hospital

4. Bangalore

1. Bowring & Lady Curson

2. Central Leprosarium, Magadi Road.

3. HSIS Gosha Hospital, Taskar Town.

4. Isolation Hospital, Old Madras Road

5. Lady Willingdon & TB Demonstration Training Centre, K.G. Road.

6. Minto Opthalmic Hospital, Albert Victoria Road.

7. SDS Sanatorium, Hosur Road.

8. T.B. Sanatorium, Old Madras Road

9. Vani Vilas Hospital, Krishnarajendra Road.

10. Victoria Hospital

11. Sri Jayachamarajendra Institute of Indian Medicine, Tank Bund Road.

5. Bombay

1. J.J. Hospital
1. Bombay Hospital

2. St. George Hospital
2. Nanavati Hospital

3. G.T. Hospital
3. Radhibai Vatumal Sanatorium

4. Cama Alblese Hospital
4. Sarvodaya Hospital

5. N.M. Mental Hospital
5. Tata Memorial Hospital

6. Municipal Hospitals (three)
6. Children Orthopaedic Hospital

7. Railway Hospital
7. National Hospital

8. Naval Hospital
8. Mangal Anand Hospital

6. Calcutta

1. S.S.K.M. Hospital
1. Bahela Hospital

2. Medical College & Hospital
2. Ramakrishna Mission Seva Pratishthan

3. N.R.S. Medical College & Hospital
3. Lumbini Park Mental Hospital

4. R.G. Kar Medical College & Hospital
4. Belle Vue Clinic

5. Polyclinic at Subushan Hospital
5. Heart Care Centre

6. Diagnostic and Research Centre
6. East India Clinic

7. National Medical College

8. K.S. Roy T.B. Hospital.

7. Hyderabad

1. Osmania General Hospital
1. C.C. Shroff Hospital

2. Gandhi Medical Hospital, Secundrabad
2. Sagarlal Memorial Hospital

3. E.N.T. Hospital
3. Sai Ram Hospital

4. Quarantine Fever Hospital
4. Sharvana Nursing Home.

5. Govt. Maternity Hospital

6. Nizam Orthopaedic Hospital

7. Niloufer Hospital

8. Mental Hospital

9. Cancer Hospital

10. Osmania Dental College

11. T.B. Hospital

12. Sarojini Eye Hospital

13. Govt. Ayurvedic Hospital

14. Govt. Unani Hospital

8. Jaipur

1. Indian Red Cross Society Polyclinic (for tests only)
1. S.M.D. Hospital

2. S.M.S. Zanana T.B. and Mental Hospital.

9. Kanpur

1. L.L.R. Hospital

2. U.I.S.E. Hospital

3. U.H.M. Hospital

4. A.H.M. Hospital

5. K.P.M. Hospital

6. M.I. Chest Hospital

7. J.K. Cancer Institute

8. L.L.R. Cardiology Institute.

10. Lucknow

1. Civil Hospital
1. Ramakrishna Mission Vivekananda Polyclinic

2. Balrampur Hospital
2. U.P. Medical Centre (for CT Scan).

3. Medical College Hospital

11. Madras

1. Government Stanle, Medical College Hospital
1. Public Health Centre

2. Government Kilpauk Medical College Hospital
2. Andhra Mahila Sabha Nursing Home

3. Govt. General Hospital
3. Cancer Institute.

4. Govt. Royapettah Hospital

5. Govt. Mental Hospital

6. Govt. Ophthalmic Hospital

7. Govt. R.S.R.M. Hospital

8. Govt. Kasturba Gandhi Hospital

9. Govt. Thuruvatteswarar T.B. Hospital

10. Govt. T.B. Sanatorium, Tambaram

11. Govt. Chest Institute’s Tuberculosis Demonstration and Training Centre, Chetput

12. Institute of Obstetrics and Gynaecology and Hospital for Women and Children

13. Institute of Child Health and Hospital for Children

14. Govt. Homoeopathic Medical College and Hospital

15. Govt. Peripheral Hospital, K.K. Nagar.

12. Meerut

1. P.L. Sharma Hospital

2. Medical College Hospital

3. Dufferin Hospital

13. Nagpur

1. Medical College Hospital
1. Mure Memorial Hospital

2. Mayo General Hospital
2. Matru Sewa Sangh Maternity Hospital

3. Dental College and Hospital
3. Gopikrishna Toori Neurological Clinic

4. Mental Hospital.
4. Rashtra Sant Tukdoji Cancer Hospital

5. Nagpur Neurological Research Centre (for CT Scan).

14. Patna

1. Patna Medical College & Hospital
1. Kurjee Holy Family Hospital.

2. Nalanda Medical College & Hospital

3. Patna City Govt. Hospital

4. Rajendranagar Hospital.

15. Pune

1. Sasson General Hospital
1. K.E.M. Hospital

2. Anud Chest Hospital
2. Ruby Hall Clinic

3. Mental Hospital, Yerwada.
3. Hardikar Hospital

4. N.M. Wadia Hospital

5. Sencheti Hospital

6. Joshi Hospital

7. Sharda Clinic

8. Colony Nursing Home

9. Sanjeevan Hospital

10. Poone Hosp. & Research Centre

11. Nature Cure Institute, Urli, Kanchan.

16. Referral Hospitals (with the approval of Director, CGHS) :

1. All India Institute of Medical Sciences, New Delhi.

2. G.B. Pant Hospital, New Delhi.

17. Specialised Hospitals (with the approval of Director, CGHS) :

1. Tata Memorial Hospital, Bombay

2. C.M.C. Vellore (for Neurology)

3. Mental Hospital, Ranchi (Bihar)

4. Eyes Hospital, Sitapur (U.P.)

5. Railway Hospital, Perambur.

Circular : No. 603, dated 6-6-1991.

Issue of shares at below market value - Where shares are issued to the employees at less than market price by the employer-companies, the benefit does amount to a perquisite within the meaning of section 17(2)(iii) of the Act. The various situations in this regard have to be dealt with as under :

(i) Where the shares held by the Government has been transferred to the employee, there will be no perquisite because the employer-employee relationship does not exist between Government and the employee (transferor and the transferee).

(ii) Where the company offers shares to the employees at the same price as have been offered to the other shareholders or the general public, there will be no perquisite.

(iii) Where the employer has offered the shares to its employees at a price lower than the one at which the shares have been offered to the other shareholders/public, the difference between the two prices will be taxed as perquisite.

(iv) Where the shares have been offered only to the employees, the value of the perquisite will be the difference between the market price of the shares on the date of acceptance of the offer by the employee and the price at which the shares have been offered - Circular : No. 710, dated 24-7-1995. [See also section 17(2)(iii), proviso]

Reimbursement of tax - Amount reimbursed by way of tax by the employer to the employee forms part of the profits derived from the employment and is thus “salary” for the purpose of rule 3 of the Income-tax Rules - Letter : F. No. 35/50/65-IT(B), dated 27-4-1966.

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SHIV KUMAR GUPTA

SHIV KUMAR GUPTA (Expert)
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19 July 2007 I think rate of 5% is not appplicable ina any case . you may read our above .
thanks,
S.K.GUPTA
09810467564

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Sanjeev Kumar Varshney

Sanjeev Kumar Varshney (Expert)
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19 July 2007 Please note that the rates mentioned are applicable in case of Concessional Furnished Accomodation only not in case of Free Furnished Accomodation. It is retrospectively effective and you can claim it. How it is to be calculated is described by Mr Shiv in detail.