WFH

Value of rent-free accommodation under WFH Scenario

Work from Home

Covid-19 has disbanded the office space into work from home (WFM) facilities in view of possible spread of virus in closed facilities. The World Health Organization and the Government of India from time to time have also issued SOPs on preventive measures to contain spread of COVID-19 in offices. Resultantly as a matter of abundant caution employees are asked to function from their respective homes with the help of digital tools and technology. Virtual meeting have taken place of physical meetings. As a result home is converted into office in line with the office protocol requirements. 

Taxation of Rent free accommodation 

Salary includes perquisites among other things. Sub-s. (2) of s. 17 gives an inclusive definition of perquisite as including the value of rent-free accommodation provided to the assessee by his employer. The corresponding rule 3 of the Income tax Rules, 1962 ( meaning ‘ the Rules’) bring out a rationale and basis to compute the value of the benefits conferred upon the employees by the employer in the course of rendering services of employment. Among such list include provision of rent free/concessional accommodation. Clauses (i) and (ii) of section 17 (2) given herein below more particularly deal with taxation of rent free /concessional accommodation in several settings:-

“Salary”, “perquisite” and “profits in lieu of salary” defined.

17. For the purposes of sections 15and 16 and of this section,—

(1) ——-;

(2) “perquisite” includes—

(i) the value of rent-free accommodation provided to the assessee by his employer;

(ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;

Explanation 1.—For the purposes of this sub-clause, concession in the matter of rent shall be deemed to have been provided if,—

(a) in a case where an unfurnished accommodation is provided by any employer other than the Central Government or any State Government and—

 (i) the accommodation is owned by the employer, the value of the accommodation determined at the specified rate in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from, or payable by, the assessee;

(ii) the accommodation is taken on lease or rent by the employer, the value of the accommodation being the actual amount of lease rental paid or payable by the employer or fifteen per cent of salary, whichever is lower, in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from, or payable by, the assessee;

(b) in a case where a furnished accommodation is provided by the Central Government or any State Government, the licence fee determined by the Central Government or any State Government in respect of the accommodation in accordance with the rules framed by such Government as increased by the value of furniture and fixtures in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the aggregate of the rent recoverable from, or payable by, the assessee and any charges paid or payable for the furniture and fixtures by the assessee;

(c) in a case where a furnished accommodation is provided by an employer other than the Central Government or any State Government and—

 (i) the accommodation is owned by the employer, the value of the accommodation determined under sub-clause (i) of clause (a) as increased by the value of the furniture and fixtures in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from, or payable by, the assessee;

(ii) the accommodation is taken on lease or rent by the employer, the value of the accommodation determined under sub-clause (ii) of clause (a) as increased by the value of the furniture and fixtures in respect of the period during which the said accommodation was occupied by the assessee during the previous year, exceeds the rent recoverable from, or payable by, the assessee;

(d) in a case where the accommodation is provided by the employer in a hotel (except where the assessee is provided such accommodation for a period not exceeding in aggregate fifteen days on his transfer from one place to another), the value of the accommodation determined at the rate of twenty-four per cent of salary paid or payable for the previous year or the actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided, exceeds the rent recoverable from, or payable by, the assessee.

Explanation 2.—For the purposes of this sub-clause, value of furniture and fixture shall be ten per cent per annum of the cost of furniture (including television sets, radio sets, refrigerators, other household appliances, air-conditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, the actual hire charges payable for the same as reduced by any charges paid or payable for the same by the assessee during the previous year.

Explanation 3.—For the purposes of this sub-clause, “salary” includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called, from one or more employers, as the case may be, but does not include the following, namely:—

(a) dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;

(b) employer’s contribution to the provident fund account of the employee;

(c) allowances which are exempted from the payment of tax;

(d) value of the perquisites specified in this clause;

(e) any payment or expenditure specifically excluded under the proviso to this clause.

Explanation 4.—For the purposes of this sub-clause, “specified rate” shall be—

(i) fifteen per cent of salary in cities having population exceeding twenty-five lakhs as per 2001 census;

(ii) ten per cent of salary in cities having population exceeding ten lakhs but not exceeding twenty-five lakhs as per 2001 census; and

(iii) seven and one-half per cent of salary in any other place;

Rule 3 on valuation of perquisites

The adjunct rule 3 (1) in this regard tabulate separately the basis of valuation of furnished or unfurnished accommodation under various situations such as:

1. Where the accommodation is provided by the Central Government or any State Government to the employees either holding office or post in connection with the affairs of the Union or of such State;
2. Where the accommodation is provided by any other employer and the accommodation is owned by the employer;
3. Where the accommodation is provided by any other employer and the accommodation is taken on lease or rent by the employer
4. Where the accommodation is provided by the employer specified in serial number a or b or c in a hotel (except where the employee is provided such accommodation for a period not exceeding in aggregate fifteen days on his transfer from one place to another).

“Accommodation” includes a house, flat, farm house or part thereof, or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure.

Hence, the rule does not provide for valuation method in case of use of rent free accommodation for work from home meaning work from home scenario which is now commonly in vogue and perhaps going to stay in the corporate world for a good amount of time. More so the WFH is proving to be more efficient to the organizations in absence of digital divide and access to technological advances.

As against this rule 3(2) provide for valuation of perquisite for provision of motor car to the employees under varied situations viz.;

1. Where the motor car is owned or hired by the employer and is used wholly and exclusively in the performance of his official duties;
2. Where the motor car is owned or hired by the employer and is used exclusively for the private or personal purposes of the employee or any member of his household and the running and maintenance expenses are met or reimbursed by the employer;
3. Where the motor car is owned or hired by the employer and is used partly in the performance of duties and partly for private or personal purposes of his own or any member of his household and the expenses on maintenance and running are met or reimbursed by the employer;
4. Where the motor car is owned or hired by the employer and  is used partly in the performance of duties and partly for private or personal purposes of his own or any member of his household and the expenses on running and maintenance for private or personal use are fully met by the assessee;
5. Where the employee owns a motor car but the actual running and maintenance charges (including remuneration of the chauffeur, if any) are met or reimbursed to him by the employer and such reimbursement is for the use of the vehicle wholly and exclusively for official purposes;
6. Where the employee owns a motor car but the actual running and maintenance charges (including remuneration of the chauffeur, if any) are met or reimbursed to him by the employer and such reimbursement is for the use of the vehicle partly for official purposes and partly for personal or private purposes of the employee or any member of his household;
7. Where the employee owns any other automotive conveyance but the actual running and maintenance charges are met or reimbursed to him by the employer and such reimbursement is for the use of the vehicle wholly and exclusively for official purposes;
8. Where the employee owns any other automotive conveyance but the actual running and maintenance charges are met or reimbursed to him by the employer and such reimbursement is for the use of vehicle partly for official purposes and partly for personal or private purposes of the employee.

Clearly therefore in case of provision of motor car the rule take into account a situation where the motor car is used wholly and exclusively in the performance of his official duties and assign NIL value of perquisite in that case. Also when the same is used partly in the performance of duties and partly for private or personal purposes of his own or any member of his household the rule provide for a concessional value of perquisite considering further whether the expenses on maintenance and running are met or reimbursed by the employer or borne by the employee, as the case may be. 

No straight jacket formula for WFH

WFH by its natural meaning assume use of home for official purpose in which case there is no rationale to tax the employee on the value of any perquisite. In other words in WFH scenario where the employee discharge his official duties from home there should by NIL value of perquisite in the absence of any straight jacket formula in rule 3(1) for computation of concessional rate of taxation in a scenario where the home is also used party for private purpose.

In the circumstances therefore since under WFH scenario the home or part of the home is utilized for discharging office functions there is no reason for the employer to compute any perquisite of such use especially when no separate amount is paid to him for maintaining an office at his home. Employer may issue a letter of modification in terms of the employment to the employee in this regard and provide WFH protocol for office use, conduct and procedure stating clearly therein that the company would provide at its own expense an office in the employee’s home. Thereafter there would not arise any need to compute any perquisite for WFH.

CA Gopal Nathani