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Now, company flats wont be as taxing
November, 16th 2007

Perk tax would be 15% in cities with population over 25 lakh, 10% for 10-25 lakh and 7.5% for others

If you live in company accommodation, there is good news for you. As per a recent CBDT notification, you would be paying lesser tax on housing.

So far (before FY08), as per Rule 3, for employer provided accommodation, employees had to pay a perk tax of the lower amount between 20% of salary or the amount of rent paid on their behalf by the employer.

The Finance Act 2007 ushered in what at first glance seemed a beneficial amendment by lowering such tax from 20% to 15%.

At a time when property prices and consequently lease rents were sky high, a 5% reduction in the tax outgo would indeed bring in a semblance of relief to the harried taxpayer.

And whats more - in a show of rare magnanimity, the lower rate of tax was made applicable retrospectively with effect from the previous year (FY06 onwards).

However, the cheer was a bit premature. While the lower tax rate (15%) was made applicable by amending Sec. 17, Rule 3 that specified the 20% rate was kept intact.

This led to the anomalous situation where the law actually prescribed two different tax rates (20% and 15%, respectively) for the same item of income.

Then came July 31 and employers and employees alike had no clue as to the correct rate to adopt. To make matters worse, there seemed to be no consensus amongst the experts on this issue.

Some experts held the view that the 15% rate is applicable only in cases where a concession in rent is given by the employer. In other words, where an employee pays no rent whatsoever, the 20% rate as specified by Rule 3 continued to apply.

Others felt that where there is a 1% concession, there could also be a 100% one and the taxpayer, notwithstanding whether he bears any rent on account of the accommodation or not, is indeed entitled to the lower rate.

Thankfully, now, Notification No. 271/2007 dated 7-11-2007 has laid the controversy and debate to rest by amending Rule 3 and incorporating the lower rate therein, too.

Accordingly, perk tax on housing in cities having population exceeding 25 lakh (as per 2001 census) would be 15%, in cities having population between 10 lakh and 25 lakh 10% and in other cases 7.5%.

Lets see what this means to the average taxpayer in terms of the actual quantum of benefit. We will take the 15% rate as generally applicable.

Examine your Form 16 for 2006-07. The figure that appears against perk value on company accommodation has been calculated using the 20% rate.

Recompute it by using the 15% rate. Apply your average tax rate to the difference to arrive at the actual amount of monetary benefit that could be available to you.

Lets take the case of Ganesh Mehta who lives in Mumbai and is in the highest tax bracket of 34%. For FY 06-07, the perquisite value of accommodation as per his Form 16 is say Rs 10 lakh.

As explained earlier, this is at the 20% rate. The proportionate figure with the new 15% rate would be Rs 7.50 lakh (Rs 10 lakh x 15/20), or Rs 2.50 lakh less.

Now, 34% of Rs 2.50 lakh works out to Rs 85,000, which is what Mehta is entitled to as a refund from income tax. This is for FY07.

However, remember that this benefit is available retrospectively from FY06. Therefore, a similar exercise will have to be carried out by Mehta using his Form 16 for FY06.

Then, in order to actually avail of the benefit, he will have to file a revised return incorporating the new figures and claiming a refund of the excess tax paid.

A revised return can be filed within one year from the end of the relevant assessment year as long as the original return is filed in time.

In simple terms, for FY06, provided you have filed the return on time (by July 31, 2006), you can file a revised return before March 31, 2008. For FY07, the relevant date would be before March 31, 2009.

No doubt, this latest amendment would benefit taxpayers availing of company provided accommodation across the board - however, as the benefit is a percentage of the total amount of salary (including bonus for the year) as also a function of your tax rate, it follows that higher the salary amount, the greater would be the benefit.

That said, anyone who wishes to profit from this amendment better get started soon. Get in touch with your tax consultant or CA for the revised return business for FY06, the clock has started ticking and we all have just around four months remaining.

Sandeep Shanbhag
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