Thirty two-year-old Varun Dubey recently got transferred from the Lucknow branch of a public sector bank to New Delhi. This is his second transfer, but his family does not like the accommodation being provided by the bank. As a result, Dubey is looking for an apartment on his own. However, he is not sure which one will work out better.
Many like Dubey face this dilemma — choosing between a self-leased and a company-provided accommodation. The dilemma only intensifies when one considers the impact of the choice on their tax liability. Varda Pendse, director of Cerebrus Consultants, an HR consulting firm, says, “People prefer renting out properties on their own, as they can claim a deduction using the house rent allowance (HRA). However, there are no financial benefits for opting for a company-leased house.”
The basic difference between the two: if you rent out a place on your own and are using HRA to pay the rent, you can claim a deduction. However, in case of company-owned properties, the perquisite is computed on a notional basis and gets added to your salary, thereby increasing your taxable salary.
Self-leased property
Although HRA is not mandatory, most employers include it. However, a deduction can be claimed only if you are actually spending it. You may be paying a rent to your landlord, or even your parents if you are living with them. However, in the latter case, the tax liability will be passed on to your parents.
Also, the entire HRA may not always be claimed as a deduction. Say, Dubey earns Rs 1 lakh every month and his basic pay is Rs 50,000. His HRA is Rs 20,000 and the actual rent that he pays is Rs 15,000. The deduction he can claim must be the lowest of actual HRA received (Rs 20,000), 50 per cent of basic (Rs 25,000, 40 per cent if he was living in a non-metro) and the excess rent paid over 10 per cent of the salary (Rs 10,000). Thus, he can only claim Rs 10,000 as a deduction on a monthly basis. Thus, Dubey’s taxable salary is Rs 90,000.
Provided by company
It can include company-owned or leased properties. Depending on its ownership, the tax incidence for you would vary. Say, you are staying in a company-owned house. Here, a specific percentage of your salary will be added on a notional basis to calculate your total taxable income. So, if you are staying in a city with a population of more than 20 lakh, 15 per cent of your salary is added, and 10 per cent for cities with a population of 10-20 lakh and 7.5 per cent for all other areas. Salary, here, includes basic pay, all allowances, commissions and bonuses.
In case of company-leased properties, the lower of the actual rental paid and 15 per cent of your salary is added as perquisite. If Dubey chooses this option, his actual salary would be reduced as the company would pay the rent on his behalf. That is, his salary would be Rs 80,000, as his company is paying a rent of Rs 20,000. Dubey cannot claim any deduction. As 15 per cent of the salary (Rs 12,000) is lower than the actual rent of Rs 20,000, this sum will be added as a perquisite. His taxable salary would, thus, be Rs 92,000.
Dubey’s employer can also recover a part of the rent paid. “This amount is determined on a contractual basis and is not governed by law. The employers can decide the amount to be recovered on their own,” says Homi Mistry, tax partner, Deloitte, Haskins and Sells. However, in this case, his perquisite will get reduced to the extent of the recovery made from him.
However, the higher the salary, the higher would be the perquisite component added.
