The Central Board of Direct Taxes (CBDT) has introduced modifications in the income tax regulations concerning the assessment of benefits related to employer-provided rent-free or discounted housing for employees. These amendments, effective from September 1, 2023, will result in reduced tax liability for employees receiving rent-free accommodations, which will be subject to higher take-home pay.
The Finance Act of 2023 introduced an amendment specifically addressing the calculation of ‘perquisite’ related to the value of rent-free or concessional housing provided by employers to their employees. The new income tax rules, aimed at providing tax relief to taxpayers, states the following:
- In cities with a population exceeding 40 lakhs according to the 2011 census, 10 percent of the salary will be considered for taxation.
- In cities with a population exceeding 15 lakhs but not exceeding 40 lakhs according to the 2011 census, 7.5 percent of the salary will be considered for taxation.
| Previous Categorisation and Rates | New Categorisation and Rates | ||
|---|---|---|---|
| Population | Prerequisite Rate | Population | Prerequisite Rate |
| More than 25 lakh | 15% | More than 40 lakhs | 10% |
| Between 10 lakhs and 25 lakh | 10% | Between 15 lakhs and 40 lakhs | 7.5% |
| More than 25 lakh | 7.5% | Less than 15 lakhs | 5% |
A “perquisite” is described as any incidental payment or advantage linked to a job or position, in addition to regular salary or wages. This definition is mentioned in Section 17(2) of the Income Tax Act, of 1961.
Rent-free housing is a benefit provided by employers to their employees, offering them a place to live without or with minimal cost. It’s a form of employee compensation subject to taxation under the “Salaries” category and is linked to their employment.
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The new income tax rules will have an impact on taxpayers beyond any question. Employees will receive a reduction in their tax burden given the decreased taxable value of rent-free housing, resulting in higher take-home pay. Starting from September 1, 2023, these amendments will reduce the valuation of unfurnished rent-free accommodations from non-government sources, effectively reducing the taxable portion based on the revised rates.
