CBDT Revises Rule 3 to Lower Rates of Rent-free Accommodation Valuation & Introduces an Inflation-linked Cap
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- Last Updated on 21 August, 2023
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Notification No. 65/2023, dated 18-08-2023
By virtue of Section 17(2) of the Income Tax Act, 1961, the value of rent-free accommodation provided by an employer to the employee is treated as a perquisite. The valuation of such perquisite is made as per the valuation method prescribed under Rule 3 of the Income Tax Rules, 1962.
The Finance Act, 2023 amended section 17(2) to rationalize the provisions relating to the valuation of such accommodation. Now, the Central Board of Direct Taxes (CBDT) has amended Rule 3 providing the revised method for valuation of rent-free accommodation.
Significant changes with respect to the valuation method have been prescribed in cases where the accommodation is provided by an employer (other than Central Government or State Government) to its employees. The changes are as follows:
1. In cases where the accommodation is owned by the employer
If the population of the city as per the 2011 census-
(a) Above 40,00,000: The valuation rate is reduced to 10% (from 15%) of the salary.
(b) 25,00,000 to 40,00,000: The valuation rate is reduced to 7.5% (from 15%) of the salary.
(c) 15,00,000 to 24,99,999: The valuation rate is reduced to 7.5% (from 10%) of the salary.
(d) 10,00,000 to 14,99,999: The valuation rate is reduced to 5% (from 10%) of the salary.
(e) Below 10,00,000: The valuation rate is reduced to 5% (from 7.5%) of the salary.
2. In cases where the accommodation is taken on lease or rent by the employer
The amount of perquisite shall be lower of the actual amount of lease rental or 10% (reduced from 15%) of the salary.
3. In case same accommodation is provided for more than one year
Where the same accommodation is continued to be provided to the same employee for more than one year, the valuation in subsequent years will not exceed the first year’s valuation adjusted by the Cost Inflation Index. In this context, the “first year” means the financial year 2023-2024, or the financial year in which the accommodation was provided to the employee, whichever is later
Thus, the perquisite value of rent-free accommodation in the subsequent year shall be lower of the following:
(a) Perquisite value computed as per the above rules; or
(b) First year’s perquisite value as adjusted by the Cost Inflation Index (CII).
The adjusted first year’s perquisite value shall be computed as per the following formula:
Adjusted first year’s perquisite value = First year’s perquisite value * CII of the subsequent year/CII of the first year
It is to be noted that the above changes in Rule 3 shall be effective from 01-09-2023. Therefore, valuation for the period before 01-09-2023 shall continue to made as per existing rules.
Click Here To Read The Full Notification
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