By Manoj Pandey
Provision of accommodation, either as rent-free accommodation (RFA) or house rent allowance (HRA), is a commonly-used component in the gross salary packages of employees. Even today, accommodation benefits remains a tax-efficient component of one’s salary.
Tax laws provide specific rules for valuation of accommodation provided by the employer and these are broadly based on the type of employer, city population, whether the accommodation is furnished or not, and whether it is owned or leased by the employer.
Where accommodation is not owned by the employer, but taken on lease, the taxable perquisite is the actual lease rent paid by the employer or 15 per cent of salary, whichever is less. In case of unfurnished accommodation, the taxable perquisite is 15 per cent of salary in cities with population exceeding 2.5 million, 10 per cent of salary where population is between one million and 2.5 million, and 7.5 per cent of salary where population is one million or less. This value is further increased by 10 per cent per annum for the cost of furniture where it is owned by the employer. For hired furniture, the hire charges paid by the employer is considered as taxable benefit.
Where accommodation is provided in a hotel, the taxable value of perquisite is 24 per cent of salary or the actual charges paid or payable to the hotel. However, no taxable perquisite arises if the employee is provided hotel accommodation on transfer from one place to another for a period of 15 days or less.
Let’s consider the case of Sanjeev, an IT graduate, and find out which offers more benefit to him, HRA or RFA?
Both companies have offered him a gross annual package of Rs15 lakh. Company A has offered him an RFA equivalent of Rs2.4 lakh and Company B, an HRA of similar amount. Where Sanjeev accepts Company A’s offer, he will receive Rs12.60 lakh per annum (excluding annual rental of Rs2.4 lakh paid by the company towards accommodation. If he accepts Company B’s offer, he will receive Rs15 lakh every year, but will spend Rs2.4 lakh annually on rent. Sanjeev will be better off in terms of net annual outflow by Rs19,467 if he were to opt for HRA vis-à-vis RFA. (See Tax Calculation).
However, tax savings alone cannot be the decisive criterion in determining the efficiency of RFA vis-à-vis HRA. We cannot ignore other non-tax or practical considerations associated with RFA, such as savings on security deposit, brokerage, time and effort to identify accommodation, and preference of landlords for a company lease transaction. Besides, the brokerage paid by employer to obtain leased accommodation for employee is not a taxable perquisite in the hands of the employee.
As such, it’s important to evaluate RFA or HRA options in light of tax as well as other practical considerations.
(The author is manager, Deloitte Haskins & Sells.)
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