Rent Free Accommodation (RFA): Its Taxability And Valuation

As per the Income Tax Act, employees receiving rent-free accommodation (RFA) from their companies are eligible to pay tax on RFA. This is because rent-free accommodation is a perquisite offered to an employee by an employer, which is taxable under the head of income 'Salaries', according to the IT Act. 

Thus, it is essential to determine the valuation of rent-free accommodation as provided to an employee by his or her company. Continue reading this article for a complete guide on the meaning and taxability of rent-free accommodation.

What is Rent-Free Accommodation?

As the name suggests, rent-free accommodation is a residential arrangement allotted to an employee against zero or minimal rent. An employer offers this perquisite to his company's employees. Rent-free accommodation can include a flat, guest house, hotel, service apartment, caravan, mobile home, and more. 

Though employees need not pay rent for accommodation in a company-provided apartment, they need to pay tax against this accommodation. This is because a company adds the provided perquisite under its employee's (taxpayer's) salary. Thus, an employee's total income is assessed, including all the perquisites (in this case, rent-free accommodation), which are taxable.

Types of Rent-Free Accommodation

There are two types of rent-free accommodation as offered by the central government, state government, private and other companies:

• Furnished Rent Free Accommodation
• Unfurnished Rent Free Accommodation

Rent-Free Accommodation Taxability

Here is the procedure for calculating income tax on rent-free accommodation as per accommodation type:

• Unfurnished Rent-free Accommodation

In the case of unfurnished rent-free accommodation, the perquisite value is calculated per the city's population. Thus, the perquisite varies as follows:

1. For cities above 25 lakh residents, 15% of your salary will be valued as the perquisite.
2. In cities that hold a population of more than 10 lakh but less than 25 lakh, the perquisite would be 10% of your salary.
3. For cities with a population of 10 lakh, 7.5% of the salary will be valued as perquisite.

Note: The mentioned valuation applies to private sector employees where the employer is the property owner.

For properties taken on lease by an employer, the value of perquisite is the actual lease rental as paid by an employer or 15% of an employee's salary, whichever is lower. 

• Furnished Rent-free Accommodation

Furnished rent-free accommodation includes modern amenities like television, furniture, air-conditioner, etc. In the case of such accommodation, if furniture is owned by employer an additional 10% of the actual price of the amenities is added as a perquisite. If furniture is hired by the employer then the actual hire charges are to be added as a perquisite.

• Taxability of Hotel Accommodation as Provided by the Employer

When an employer offers housing to an employee for 15 days and above as rent-free accommodation, the value of perquisite is computed as follows:

1. 24% of the salary
2. Actual charges payable or paid to the hotel (whichever is lower)

This is only applicable to permanent employees. Temporary employees sent to a location for project execution or accommodated at offshore sites do not count. Thus, the following requirement is applicable if an employee gets accommodation at a new place due to transfer while retaining existing accommodation:

1. Perquisite will only be calculated for one accommodation that has a lower value if the stay does not exceed 90 days.
2. If the period exceeds 90 days, the perquisite will be charged for both accommodations.

Rent-Free Accommodation Calculation Example

Here is a detailed illustration of the rent-free accommodation calculation procedure:

Let's assume Mr Prabhat is an employee of XYZ company. His posting is in Jamshedpur (approximately 16 lakh population), drawing a basic salary of Rs. 4,00,000, a dearness allowance of Rs. 12,000 (this forms the salary part that includes all retirement benefits), and Rs. 6,000 as commission. Prabhat also gets an unfurnished rent-free accommodation from the company in Jamshedpur. 

The employer owns this accommodation which comes for a rent of Rs. 60,000 p.a. Thus, the value of the perquisite (rent-free accommodation) counts as per the employee's salary. Prabhat's total salary is Rs. 4,18,000 by adding up the basic, dearness allowance, and commission. 

Prabhat received the accommodation in Jamshedpur, where the population is below 25 lakh but above 10 lakh, so he needs to pay 10% of his salary as perquisite value. Thus, the taxable value of the perquisite is Rs. 41,800. 

Tax Exemption on Rent-Free Accommodation

Check out the following situations that offer tax exemption on rent-free accommodation:

• If the accommodation is provided in a remote area, it is not taxable as per the law.
• When your company accommodates you in a hotel for less than 15 days due to your transfer, the perquisite value shall be eligible for tax exemption.
• If a rent-free accommodation is provided to a member of UPSC, Supreme Court Judge Union Minister, Parliament official, High Court Judge, Leader of Opposition in Parliament, etc., it does not come under taxable perquisite.

Final Word

Though taxable, this perquisite is beneficial if your workplace is far from your house. Moreover, you can get tax exemptions on rent-free accommodations under certain circumstances. Thus, employees should know about this perquisite in detail to understand its taxability and valuation properly.