It is a pretty standard practice that employer organizations provide free accommodation to their employees. It may be done due to various reasons. At times, the employer organizations believe that providing this kind of a facility will help them in attracting talent for locations which are otherwise not attractive to the manpower pool.
For instance, there are several tea companies which provide free accommodation to their employees in places like Assam and Himachal Pradesh in order to incentivize them to stay at a non-metro location which is far from the urban lifestyle most people are used to.
At the same time, there are corporate houses which provide free accommodation to their top cadre employees and the ones who are too critical for their business operations. Companies also provide various other facilities such as gardener, driver, cleaner, etc.
These facilities may look to be free prima facie but an employee enjoying these services needs to factor-in these under the head called ‘perquisites’. For that matter, these facilities are not really free!
The Income Tax Act in India identifies all the free services provided by an employer to an employee and even his family to be taxable. This includes parents, spouse, children, children’s spouses, servants and other dependents of the employee to who the facilities are being provided.
The definition of accommodation revolves around residential apartment, bungalow, villa, flat and even covers farm house, serviced apartment and guest house for that matter. Notably, all the other services provided to the employee by an employer, whether directly or indirectly, are taxable in the hands of the employee.
Tax treatment in case of central and state government employees
If the free accommodation and other connected facilities are provided by the central government to an employee, the value of such perquisites is already pre-determined and the same has to be factored-in by the employee. In the same manner, the various state governments have also ascertained certain license fee towards all such perquisites provided to their employees and therefore there is no ambiguity from the valuation perspective.
In case, if the government is receiving any rent from the employee for the accommodation being provided, then the same amount should be deducted from the total value of perquisites.
Tax treatment in case of private sector employees
The taxability of the perquisites provided to a private sector employee depends on the ownership of the property by the employer. If the employer organization has availed of the property on rent, then the actual rent paid by the employer, subject to a maximum of 15 percent of the salary of the concerned employee, shall be taken under consideration.
The threshold of 15 percent is applicable in case the accommodation is situated in a city having population of above 25 lakh. If the population is between 10 and 25 lakh, this number goes down to 10 percent. For all other places, that implies places having population less than 10 lakh, this threshold goes down to 7.5 percent.