In a move to provide employees with higher take-home salaries and savings, the Income Tax Department has announced revisions to valuation norms for rent-free accommodation. The changes, set to take effect from September 1, are expected to particularly benefit high-earning individuals who receive employer-provided housing perks, as per a notification by the Central Board of Direct Taxes (CBDT).

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As per the notification, where unfurnished accommodation is provided to employees other than the central or state government employees and such accommodation is owned by the employer then the valuation shall be:

(i) 10 percent of salary (reduced from 15 percent) in cities having population exceeding 40 lakh as per 2011 census (earlier, 25 lakh as per 2001 census)

(ii) 7.5 percent of salary (reduced from 10 percent) in cities having population exceeding 15 lakh but not exceeding 40 lakh as per 2011 census (earlier, 10 lakhs but not exceeding 25 lakhs as per 2001 census).

Amit Maheshwari, Tax Partner at AKM Global, emphasised that these changes would positively impact employees with significant incomes who avail of employer-provided accommodation. These revisions are projected to shrink the taxable base for such individuals, ultimately resulting in higher take-home pay. "The perquisite value shall be lower resulting in relief to them in the form of take-home pay."

AMRG & Associates CEO Gaurav Mohan said these provisions incorporate the insights 2011 census data and aim to rationalise the perquisite value calculation.

"Employees enjoying rent-free accommodation would see rationalisation of perquisite value leading to a reduction in taxable salary, increasing the net take-home pay. It is worth noting that the reduction in the perquisite value of rent-free accommodations will yield dual implications: on the one hand, it will generate tangible savings for employees, while on the other hand, it will result in a corresponding decrease in government revenue," Mohan said.

He further said this change will lead to disproportionate benefits for higher-income employees who receive expensive accommodations. Lower-income employees with more modest accommodations might not experience significant tax relief.

Moreover, this shift might prompt corporate employers to strategically revisit and potentially reshape their existing compensation frameworks, particularly if they can capitalize on tax advantages for their workforce, Mohan added.