Rent Free Accommodation implies the house made available to you from the employer for residential uses. A few employees also get residence facility from their employer free of cost, although in some instances it can be charged to some degree. RFA is a part of the perks that are deemed to be added benefits obtained by your employee in kind and is taxable in accordance with the provisions of the Income Tax Act.

Employees sometimes shall receive some extra incentives or services from their employer, that form part of the individual’s profits received by them by compensation. These privileges are classified as perks and are taxable in compliance with the provisions of the Income Tax Act. Perquisites are typically given in kind instead of in money terms by the employer. Accommodation is one of the major components of perks provided to employees. It may be in the form of ‘rent-free accommodation’ or accommodation in which a minimum sum of rent is incurred by the employee.

What-is-Rent-Free-Accommodation
What-is-Rent-Free-Accommodation

For the purposes of tax calculation, the accommodation offered by an employer to the employee is divided into two major groups. These are –

  • Accommodation given to its employees by the Central and State Governments.
  • Accommodation is given to salaried employees not employed by either the Central or State Government.
What is Rent Free Accommodation (RFA)

This accommodation could perhaps be defined as follows.

  • Furnished accommodation.
  • Unfurnished accommodation.

Calculation of Income Tax on Accommodation provided by the Central or State Government:

All form of accommodation given to those individual working for Central Government or the State shall be taxable in the following way:

Unfurnished Accommodation:

Unfurnished housing offered by the central & state Government. The income tax imposed on the value of this specific type of property shall be calculated by subtracting the rent paid by the employee for the lodging from the licensing fee levied or imposed by the central or state government.

Furnished Accommodation

In the case of unfurnished accommodation issued by the Central or State Government, the income tax imposed on the value of this particular type of perquisite shall be computed by subtracting the rent paid by the employee for the accommodation from the cumulative overall license fee imposed or determined by the Central or State Government, any of the following.

Lease fee or charge if the furniture is rented or purchased by rent.

Depreciation by 10% on furniture or appliances if it is purchased by the employer.

Calculation of Income Tax on Concessional or Rent Free Accommodation provided by Non-Government Employees:

Accommodation offered to people who are not working by the federal or state government could be either ‘rent-free,’ in which the employee does not have to pay rent to his or her employer, or ‘concessional,’ where the employee would only have to give a relatively low or minimum sum as rent to his or her employer. The income tax imposed on this form of accommodation shall be determined in the following order, as per the categorization referred to above.

Unfurnished Accommodation:

The computation of income tax payable for unfurnished housing is further separated into 2 categories:

If the Unfurnished Accommodation is owned and given by the employer,

  • The income tax charged shall be 15% of the income or salary received by the employee, less the real rent paid by the employee to his or her employer. This applies to employees living and operating in cities with a total population of more than 25 lakhs.
  • The income tax charged shall be 10% of the income or compensation received by the employee, less the rent paid by the employee to his or her employer. This refers to workers who reside and work in cities where a total population is more than 10 lakhs but far less than 25 lakhs.
  • The income tax charged shall be 7.5% of the income or salaries received by the employee, less the rent paid by the employee to his/her employer. This refers to workers who live and work in cities with a population of fewer than 10 lakhs.

If the Unfurnished Accommodation is rented to the employee, the income tax payable on the perks would be the value received by the employer as part of the mortgage, or 15% of the employee’s wages or wages, whichever is lesser, less the rent paid by the employee to his or her employer.

Furnished Accommodation

The estimation of income tax owed in respect of furnished accommodation is also further classified into two categories.

If the furnished accommodation is owned and given by the employer, the income tax imposed shall be determined by subtracting the rent paid by the employee to his/her employer from the taxable amount of the unfurnished accommodation and any of the following.

  • The rental fee or the leasing fee whether the furniture is rented or leased.
  • A loss of 10% on furniture or appliances whether it is owned by the boss.

If the furnished accommodation provided to an employee is rented by the employer, the income tax imposed shall be determined by subtracting the rent paid by the employee to the employer from the taxable amount of the unfurnished rented accommodation and any of the following.

  • The rental fee or the leasing fee whether the furniture is rented or leased.
  • A depreciation of 10% on furniture or appliances whether it is purchased by the employer.