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Published: August 21, 2023
Updated: August 21, 2023

Boost to Employee Savings: CBDT Introduces New Rules for Valuing Rent-Free Accommodation

In a move set to positively impact employees' financial wellbeing, the income tax department has introduced revised norms for valuing rent-free accommodation provided by employers. The Central Board of Direct Taxes (CBDT) recently notified amendments to the Income Tax Rules, ushering in changes that will enable employees with substantial salaries and employer-provided rent-free housing to enjoy greater savings and an increased take-home pay.

Revised Valuation Rules Take Effect:

The new rules, set to come into effect on September 1, stem from an amendment brought about by the Finance Act, 2023. These rules address the calculation of 'perquisite' concerning the valuation of rent-free or concessional accommodation extended to employees by their employers.

Population-Based Categorization Updated:

The notable change is the revision of categorization and population limits, which have been updated from the 2001 census to the 2011 census. This adjustment aims to reflect current demographic realities more accurately.

Impact on Unfurnished Accommodation:

For employees in the private sector who are provided with unfurnished accommodation owned by their employers, the revised limits of population have been adjusted. These thresholds now stand at more than 40 lakh, between 15 lakh and 40 lakh, and less than 15 lakh.

Reduction in Perquisite Rates:

The amendment also entails a reduction in the perquisite rates applicable to different population categories. Formerly set at 15%, 10%, and 7.5% of the salary, these rates have been revised to 10%, 7.5%, and 5% respectively.

Fair Tax Implication for Extended Stays:

Furthermore, the revised rule takes into account scenarios where an employee occupies the same accommodation for more than one previous year. This adjustment aims to ensure a fair tax implication for such extended stays.

Enhancing Employee Take-Home Pay:

Experts believe that employees drawing substantial salaries and benefiting from employer- provided accommodations will witness an increase in their take-home pay due to lower taxable bases resulting from the revised rates. This reduction in perquisite value could lead to significant relief and savings for these employees.

Balancing Revenue and Savings:

The revision holds dual implications - while it increases savings for employees, it also leads to a decrease in government revenue. This shift could disproportionately benefit higher- income employees with expensive accommodations, potentially prompting corporate employers to reassess their compensation structures.

The new CBDT rules bring a breath of fresh air for employees with rent-free accommodations, creating a more favourable financial environment. The revised valuations align with modern demographic data, providing a fair and updated framework for valuing perquisites. This positive step is expected to foster increased employee savings and contribute to their overall financial well-being.