This week’s article is for employees, especially those who relocate to a different place only for employment. Such persons are normally offered premises to live by the employer. Or they have the option of choosing and renting a house on their own. This situation may even be applicable to those who haven’t relocated – if their employer offers them accommodation, then what is the tax impact of renting the accommodation themselves versus opting for the company provided one? In this regard, we reproduce the following exchange between us and one Mr. Pandit, one of our clients who had had to relocate to Delhi for a couple of years to execute a project for his company. Since the issues raised and discussed are of common interest and apply to taxpayers in general, we are reproducing our dialogue verbatim.
Dear Mr. Shanbhag,
As I have been discussing with you, finally it looks like I would have to move to Delhi for around two years. The main issue that concerns me is that of accommodation. Since this is a short-term assignment, I would need to lease a house. My company has very kindly offered me the option of either renting suitable premises on my own by or they are willing to provide me with one. In the former case, I am given to understand that my salary will be suitably adjusted (increased) after which I can pay the lease rent and claim the HRA deduction on my own. On the other hand, if my company were to allot accommodation to me, they would pay the lease rent themselves but not increase the take home. Now, my dilemma is to do with the tax impact of selecting either of these options. Upon speaking to a couple of people including my HR and doing some research on my own, I confess I am more confused.
Some of my questions are:
- What is meant by suitably adjusting my salary? Note that such adjustment will not be carried out if I choose company leased premises.
- What is meant by perquisite value? Some say it is 20 per cent and yet others maintain it is 15 per cent.
- If I opt for paying the rent myself, is the entire rent deductible? If not, what amount is deductible?
Given the circumstances, please suggest the most tax optimal course of action.
Dear Mr. Pandit,
In the case of company provided accommodation, the lease rent, that otherwise would have been payable by you, is ipso facto borne by the company. As explained further on, though you have to pay tax on this benefit, the fact nonetheless remains that by opting for company accommodation, you do not have to pay the rent out of your pocket. However, if you choose not to opt for company provided accommodation but instead choose to pay rent on your own, your salary has to be suitably enhanced to cater to this additional expense. This is what they mean by saying that the salary would be suitably adjusted if you choose not to opt for company accommodation.
It seems to me that you would be better off leasing the place on your own. But before I explain why, let’s discuss the concept of perquisite value. A perquisite is a benefit that an employee enjoys or is entitled to on account of his or her job or profession. Since this benefit is over and above the monetary salary that is paid to the employee, the law has prescribed specific values for specific perquisites. Consequently, in the case of an employee who enjoys a particular perquisite, the value of such perquisite (as prescribed by the law) is added to his or her salary and the aggregate amount is then taxed in the normal course.
In the past the perquisite value of company provided accommodation used to be 20 per cent of salary or lease rent paid whichever was lower, however, as per a subsequent amendment, such perquisite value has been lowered to 15 per cent of salary (in cities having population exceeding 25 lakh). The perquisite value is 10 per cent where the population is between 10 lakh and 25 lakh and 7.5 per cent of salary in other cases.
In other words, if you were to opt for employer provided accommodation, the same is taxable as per the provisions of Sec. 17 and Rule 3 as a perquisite in the hands of the employee. The perk value in this regard (that will be added to salary), would be 15 per cent of salary since your accommodation would be in Delhi. “Salary” for the aforesaid purposes means basic salary, bonus, commission, fees and all other taxable allowances (excluding the portions not taxable) and any monetary payment by whatever name called. So basically, almost the entire salary will come into play for calculating the perquisite tax. Therefore, this would be like paying an extra tax of 4.5 per cent (30 per cent of 15 per cent) over and above your existing tax payable – which basically would be disastrous.
Therefore, it would be cheaper (tax wise) to lease the apartment on your own. But here too, note that the entire rent that you pay may not be eligible for tax deduction. The reason for this is that the HRA exemption regulated by rule 2A is the least of the following—
“Salary” for the aforesaid purposes means basic salary and includes dearness allowance if terms of employment so provide.
Consequently, the entire rent paid may not be deductible. Even so, this deduction will serve to reduce your existing tax rate whereas under the alternative the additional perk tax will actually increase it. Therefore, other things remaining equal, it would be best if you pay the rent yourself instead of asking your employer to pay it on your behalf.
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- 50 per cent of salary, where residen tial house is situated at Mumbai, Cal cutta, Delhi or Madras and 40 per cent where residential house is situ ated at any other place.
- Actual HRA received in respect of the period during which rental accom modation is occupied by the employ ee during the previous year.
- The excess of rent paid over 10 per cent of salary.