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Official accommodation may soon house tax trouble
March, 08th 2007

Living in a rent-free accommodation provided by your employer may not be such a good idea. If you are living in a large city in such an accommodation, 20% of your salary will be added to your taxable income.

In you case you do pay a nominal rent to the company, the difference between 20% of your salary and the nominal rent will be added to your taxable income. In case you live in a town with a population smaller than four lakh, the concession on rent would be deemed to be 15% of your salary.

The government has proposed amendments in the Income Tax Act this Budget which will allow the income tax department to assume that employer has provided the accommodation at concessional rent, amounting to a taxable perquisite.

The government had, in 2001, notified rules for valuation of perquisites. The deemed rent then was 7.5% and 10% of salary, respectively in towns with population less than four lakh and four lakh and above. But, the amendment in the Rule 3 through this notification specifically on valuation of perk of house accommodation was challenged by some employee unions. Subsequently, in 2005, the Rule 3 was again amended and the rate of valuation of house perk was doubled to 15% and 20% for cities having population less than and more than 4 lakh respectively.

The Supreme Court, however, gave relief to employee unions and left it open to the assessee to contend if there is no concession in the matter of accommodation provided by the employer to the employees depending on the facts and in the circumstances of each case. The court had ruled so, as the provision was brought in the rules to the Act, and not the Act itself. The government has now proposed to carry out the amendment to provide for deemed value of rent in the Act itself, so as to nullify the effect of judgement.

The amendment would apply retrospectively from April 1, 2002 for the 7.5% and 10% levels of deemed rent. The revised, higher rates would apply with effect from April 1, 2005 (assessment year 2006-07).

The concession in the matter of rent shall be deemed to have been provided if unfurnished accommodation is provided by any employer other than central or state government employees. The salary for this purpose would be basic plus dearness allowance.

The amendment will have large-scale implications on companies which have set up huge townships near their plants to provide accommodation to their employees.

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