Taxation of Rent-Free Accommodation and Concessional Rent Housing: A Complete Guide

Under the Income Tax Act, 1961, rent-free accommodation (RFA) and concessional rent housing provided by employers are treated as perquisites and are taxable in the hands of employees under the head “Income from Salaries.” However, the valuation and taxation of these perquisites are governed by Section 17(2) and the rules framed under it.

This blog explains how these benefits are taxed, the valuation methods prescribed, exemptions available, and how employees can compute their tax liabilities.

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What is Rent-Free Accommodation (RFA)?

Rent-free accommodation refers to a housing facility provided by an employer to an employee without charging any rent. This benefit is considered a perquisite and is taxable in the hands of the employee as part of their salary.

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What is Concessional Rent Housing?

Concessional rent housing refers to accommodation provided by an employer to an employee at a rent lower than the market value. The difference between the market rent and the rent paid by the employee is treated as a taxable perquisite.

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Taxability of RFA and Concessional Housing (Section 17(2))

Under Section 17(2) of the Income Tax Act, RFA and concessional housing are included as perquisites in the employee’s taxable salary. The valuation of these perquisites depends on:

1. The ownership of the accommodation (whether owned or leased by the employer).
2. The location of the accommodation.
3. The population of the city.

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Valuation of Rent-Free Accommodation

The valuation rules are governed by Rule 3 of the Income Tax Rules, 1962. Below are the scenarios and valuation methods:

1. Accommodation Owned by the Employer

For rent-free accommodation owned by the employer:

Category	Valuation of Perquisite
Population exceeding 25 lakhs	15% of the employee’s salary.
Population between 10–25 lakhs	10% of the employee’s salary.
Population less than 10 lakhs	7.5% of the employee’s salary.

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2. Accommodation Leased or Rented by the Employer

For accommodation rented by the employer:
The taxable value is the lower of:

1. Rent paid by the employer.
2. 15% of the employee’s salary.

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Exceptions and Exemptions for RFA

The following accommodations are exempt from tax:

1. Accommodation Provided in a Remote Area
   If accommodation is provided in a remote area to an employee engaged in mining, construction, or related work, it is not taxable under certain conditions.
2. Accommodation for High Court and Supreme Court Judges
   Not taxable under Section 17(2).
3. Exemptions for Government Employees
   RFA provided to government employees posted at locations where official duty is required is exempt.

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Valuation of Concessional Rent Housing

The taxable value for concessional housing is calculated as follows:

1. Fair Market Rent of the Accommodation: Determined based on similar accommodations in the area.
2. Less Rent Paid by the Employee: The difference is treated as a perquisite.

Formula for Taxable Perquisite (Concessional Housing):
Taxable Value = Fair Market Rent – Rent Paid by the Employee

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Meaning of “Salary” for RFA Valuation

For calculating the taxable value of RFA or concessional housing, “salary” includes:

1. Basic Salary
2. Dearness Allowance (if terms of employment include it in retirement benefits)
3. Bonus or commission paid
4. Any other taxable allowances

Note: It does not include employer contributions to provident funds or other non-taxable benefits.

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Example of RFA Taxation

Scenario:

• Employee’s Salary: ₹10,00,000
• City Population: Exceeding 25 lakhs
• Accommodation Owned by Employer

Valuation:
15% of ₹10,00,000 = ₹1,50,000

The taxable value of RFA is ₹1,50,000, which will be added to the employee’s salary for tax purposes.

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Example of Concessional Housing Taxation

Scenario:

• Fair Market Rent: ₹30,000 per month
• Rent Paid by Employee: ₹10,000 per month

Taxable Value of Perquisite:
₹30,000 – ₹10,000 = ₹20,000 per month
Annual Taxable Value = ₹20,000 × 12 = ₹2,40,000

This amount will be included in the employee’s taxable income.

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FAQs on RFA and Concessional Housing

1. Are all employees eligible for RFA exemptions?

• Only government employees posted for official duties or those meeting specific conditions are eligible for RFA exemptions.

2. Is RFA taxable for government employees?

• Government employees provided accommodation for official purposes are generally exempt from RFA taxation.

3. Can an employee claim deductions for rent paid under concessional housing?

• No, rent paid under concessional housing is not deductible separately but reduces the taxable perquisite.

4. Are retired employees eligible for RFA tax exemptions?

• No, RFA tax exemptions are applicable only to current employees receiving this benefit.

5. What documents are required for RFA and concessional housing taxation?

• Salary slips, rent agreements, and fair market rent details should be maintained for accurate reporting.

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Conclusion

Taxation of Rent-Free Accommodation (RFA) and Concessional Rent Housing under Section 17(2) ensures that housing benefits are fairly taxed as part of an employee’s salary. Understanding the valuation rules under Rule 3 and calculating perquisites accurately is crucial for compliance and effective tax planning.

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