Sanjay Kapoor, works for a software company. Recently, his company asked him to move to Delhi to execute and help in transition of an important project. Also being his chartered accountant, Kapoor informed me that he had to shift base for two years.
He started doing his homework on the city and the expenses involved in staying there as his family planned to join him in a few months. His main concern was the rent he would have to pay for staying in Delhi and how to claim deductions of the same.
Fortunately his employer came to his rescue. They gave him an option to either rent a place on his own or they were willing to provide him one.
In the former case, Kapoor was given to understand that he could pay the lease rent and claim the deductions for the House Rent Allowance (HRA) after his salary is suitably adjusted. On the other hand, if the employer were to find a place for him, they would pay the lease rent and not increase Kapoor’s take-home pay.
Kapoor’s dilemma was to do with the tax implications associated with both these arrangements. His confusion only increased after he spoke to a couple of friends, the Human Resource executive at his workplace and tried doing some research on his own.
Here are the questions Kapoor had -
- What is meant by suitably adjusting the salary? And why won’t it be done if he chose the company leased premise?
- What is meant by perquisite value? Some say it is 20 per cent and others say 15 per cent.
- Earlier there used to be this system of Fringe Benefit Tax (FBT) which was paid by the company and recovered from the employee. Does perquisite tax work similarly?
- If Kapoor opted to pay the rent himself, will the entire rent be deductible? If not, what amount will be deductible?
Given his circumstances, Kapoor wanted to known the most tax beneficial course of action he should adopt.
In case of Kapoor’s company providing him an accommodation, the lease rent, that otherwise would have been payable by him, is ipso facto borne by the company. Though Kapoor would have to pay tax on this benefit, the fact nonetheless remains that by opting for a company provided accommodation, he does not have to pay the rent out of his own pocket.
However, if Kapoor chooses not to opt for a company provided accommodation but pay rent on his own, his salary will need to be suitably enhanced to cater to this additional expense. This is what they mean by saying ‘the salary would be suitably adjusted’ if Kapoor does not opt for the company accommodation.
I suggest Kapoor chooses to rent a place of his own. But before I explain why, there are a couple of concepts I would like to explain to the likes of Kapoor.
Firstly, under the present system of taxation, FBT is no longer applicable. The same has been replaced by perquisite-based taxation. FBT was a tax paid by the employer whereas perquisites are taxed in the hands of the employees.
Now, because FBT had to be paid by the employer in respect of some benefits granted to the employee, in some cases, employers used to recover the FBT paid by them from the employee. However, now since perquisites (or benefits) are taxed directly in the employees’ hands - there is no question of the employer having to recover anything from the employee.
Secondly, though in the past (that is, before FBT was introduced) the perquisite value of the company provided accommodation used to be 20 per cent of salary or lease rent paid, whichever was lower, as per a subsequent amendment, the value of such perquisites has been lowered to 15 per cent of salary (in cities having population exceeding 25 lakh). The perquisite value is 10 per cent in cities where the population is between 10 lakh and 25 lakh and the value stands at 7.5 per cent of the salary in other cases.
In other words, if Kapoor were to opt for employer-provided accommodation, the same would be taxable as per the provisions under Section 17 (Rule 3) as a perquisite in Kapoor’s hands. The perk value in this regard (that will be added to his salary), would be 15 per cent of salary since accommodation would be in a new city.
Salary for this purpose means basic salary, dearness allowance or DA (if applicable), bonus, commission, fees and all other taxable allowances (excluding the non-taxable portions) and any monetary payment under whatever name. So, almost the entire salary will come into play for calculating the perquisite tax. Therefore, this would be like paying an extra tax of 4.64 per cent (30.9 per cent of 15 per cent) over and above Kapoor’s existing tax liability or payable - which basically would be disastrous.
Therefore, it would be cheaper (tax wise) for Kapoor to lease an apartment on his own. Here, too, the entire rent that Kapoor pays may not be eligible for tax deduction. The reason for this is that the HRA exemption regulated by Rule 2A is the least of the following-
- 50 per cent of salary, where residential house is situated in Mumbai, Calcutta, Delhi or Chennai
- 40 per cent if the residential house is situated at any other place
- HRA in respect of the period during which leased accommodation is occupied by the employee during the previous year
- The excess of rent paid over 10 per cent of the salary
Salary, in this case, means basic salary including DA if terms of employment so provide.
Consequently, the entire rent paid may not be deductible. Even so, this deduction will serve to reduce your existing tax rate whereas under the alternative the additional perk tax will actually increase it. Therefore, other things remaining equal, it would be best if you pay the rent yourself instead of asking your employer to pay it on your behalf.
The writer is director, Wonderland Consultants