Impact of section 17(2) in computing rent-free/concessional value of accommodation

CA V.K. Subramani

Rent-free accommodation or accommodation at concessional rent is provided by the employer to employee as part of salary package. It is altogether a different matter that, now a days employees after some time avail housing loan for identifying own accommodation by way of purchase or construction. In such case, the employee is given housing rent allowance (HRA) instead of accommodation by the employer. The HRA so received would become taxable subject to provisions of section 10(13A). However, the employee is eligible for claiming housing loan interest while computing income under the head 'house property' and principal amount of loan repaid as deduction under section 80C. These benefits, would not be available if the assessee opts for section 115BAC with property being claimed as self-occupied or not being occupied owing to employment in other place and had to reside in a building not belonging to him.

Valuation of rent-free accommodation is the focus of this update and it is listed below --

(i) Where the accommodation is provided by the Central Government or State Government to employee either holding office or post in connection with the affairs of the Union or of such State, the perquisite value shall be licence fee determined by the Central or any State Government in respect of such accommodation;

(ii) Where the accommodation is provided by any other employer and the accommodation is owned by the employer, the value of perquisite is 15% of salary if the accommodation is in cities having population exceeding 25 lakhs as per 2001 census and 10% of salary where it is located in cities having population which exceeds 10 lakhs but does not exceed 25 lakhs. The perquisite value is 7.5 % of salary if the population is less than 10 lakhs.

(iii) Where the accommodation is taken on lease or rent by the employer, the perquisite value would be the actual amount of rent paid or payable by the employer or 15% of salary- whichever is lower.

The most important term to be understood in this context is meaning of the term 'salary'. Explanation 3 to section 17(2) specifies them. It reads as under:

'salary' includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called from one or more employers but does not include the following:

(i) Dearness allowance or dearness pay unless it enters in to retirement benefits;

(ii) Employer's contribution to provident fund account of the employee;

(iii) Allowances which are exempted from payment of tax;

(iv) Value of perquisites specified in section 17(2) of the Act;

(v) Any payment or expenditure specifically excluded in proviso to section 17(2); and

(vi) Lump-sum payment received at the time of termination of service or super-annuation or voluntary retirement like, gratuity, severance pay, leave encashment, voluntary retirement benefits, commutation of pension and similar payments.

Thus, the item (iv) dealing with value of perquisites specified in section 17(2) requires a little bit of elucidation. The following perquisites independent of their taxability as perquisite, are not to be considered for the purpose of perquisite value of accommodation:

1. Any expenditure paid by the employer which but for such payment is payable by the employee. Example: salary of domestic servant of employee reimbursed by the employer;

2. Amount paid by the employer for effecting an assurance on the life of the assessee-employee;

3. Interest-free or concessional loans;

4. Travel, tour, accommodation and other expenses borne or reimbursed by the employer for the holiday availed by the employee referred to rule 2B;

5. Value of free food and non-alcoholic beverages provided by the employer;

6. The value of any gift, voucher or token in lieu of which such gift may be received by the employee from the employer;

7. Membership fees and annual fees for credit card if reimbursed by the employer;

8. Club membership fee if reimbursed by the employer;

9. Benefit by way of use of any movable asset of employer by the employee or any member of his family;

10. Benefit from transfer of any movable asset of employer to the employee.