The perquisites under new CBDT rules reflective of employee gains, challenges to maintain fiscal equilibrium, ET LegalWorld | Court Practice News


On 19th August 2023, the Central Board of Direct Taxes (CBDT) modified the rules for the determination of the value of res in respect of residential accommodation provided by the employer.

WHAT WERE THE RULES RELATING TO RESIDENTIAL ACCOMMODATION PROVIDED BY THE EMPLOYER?

Employers frequently provide residential accommodations to employees, but the Income Tax Act of 1961 stipulates that if these accommodations are given for free or at a reduced rate, their value becomes taxable as a perquisite under Section 17(2) of the Act. Rule 3 of the Income Tax Rules (1962) outlines the evaluation process.

The taxable amount depends on factors like furnishing, ownership, and rental status, with recoverable employee rent lowering the calculated value.

This taxation underscores the need to consider accommodation nature, ownership, and rent recovery for fair treatment and tax compliance. While such benefits are common, their tax implications call for careful assessment to ensure equitable treatment and adherence to tax regulations.

WHAT CHANGES WERE BROUGHT TO THE ABOVE RULES?

In pursuit of achieving uniformity in the method employed for determining the taxable worth of these perquisites, adjustments were introduced to section 17(2) through the Finance Act of 2023. Subsequent to these modifications, the Central Board of Direct Taxes (CBDT) proceeded to amend Rule 3, outlining the revised approach for evaluating the value of rent-free accommodations.

These revisions encompass alterations in the valuation rate, the population threshold of urban areas, and the definition of remote locations.

Additionally, a novel provision concerning an inflation-linked ceiling has been incorporated in instances where identical lodging is offered to a single employee for a duration exceeding one year. This legislative evolution aligns with the broader objective of standardizing and enhancing the valuation framework for perquisites, fostering equitable treatment and compliance across different scenarios.

The amendments underscore the significance of ensuring parity, clarity, and adaptability within the tax code, particularly in relation to benefits like rent-free accommodations. By encompassing modifications in terms of valuation metrics, territorial parameters, and inflation-linked adjustments, the regulatory framework strives to accommodate a dynamic economic landscape and evolving tax considerations.

Commencing from September 1, 2023, a series of adjustments have been implemented in the valuation of perquisites based on the populace of cities. The re-evaluation of city classification and population criteria has shifted its foundation from the 2001 census to the 2011 census.

This shift is notable in terms of updated benchmarks, which now necessitate populations of 40 lakhs, replacing the prior threshold of 25 lakhs, and 15 lakhs instead of the earlier 10 lakh. Consequently, the preceding Perquisite rates of 15%, 10%, and 7.5% of an individual’s salary have undergone revisions to 10%, 7.5%, and 5% of their salary, respectively, as stipulated by an amended Rule.

Under the previous framework, cities with populations surpassing 25 lakhs were subject to a perquisite rate of 15%. For cities with populations ranging between 10 lakhs and 25 lakhs, the prescribed rate stood at 10%, while those with populations under 10 lakhs were taxed at 7.5%. Under the updated standards, cities with populations surpassing 40 lakhs are now subject to a perquisite rate of 10%, and those with populations ranging between 15 lakhs and 40 lakhs face a rate of 7.5%.

Finally, cities with populations below 15 lakhs are now assessed at a rate of 5%. These recalibrations reflect an enhanced and more contemporarily aligned framework in city classification and the assessment of perquisites. This alignment is vital in accommodating recent census data and economic intricacies for a more precise and equitable valuation.

WHAT ARE THE IMPLICATIONS?

Employees who enjoy the privilege of residing in rent-free accommodations would witness an organized procedure involving the adjustment of the valuation of perquisites. This recalibration of the valuation structure would subsequently yield a proportional curtailment in their taxable salary.

Consequently, this adjustment would lead to an augmentation in the net take-home pay accessible to the employees. Importantly, the reduction in the evaluated value of perquisites linked to the bestowal of rent-free accommodations engenders a dual-edged impact that warrants consideration.

Primarily, from the standpoint of the employees, this re-evaluation precipitates concrete and measurable financial advantages. These advantages manifest as appreciable savings for employees who partake in the benefit of rent-free accommodations. By reducing the taxable component of their income, these employees stand to gain in terms of retaining a larger portion of their earnings, thereby enhancing their overall financial well-being.

Conversely, the corollary implication of this adjustment resides in its impact on government revenue. The reduction in the evaluated value of these perquisites effectively translates into a corresponding reduction in the tax base. Consequently, this results in a reduction of the tax revenue accruing to the government coffers. This reduction in government revenue, while reflective of employee gains, also poses a challenge to maintaining fiscal equilibrium, potentially necessitating a re-evaluation of other revenue streams or fiscal priorities.

In summation, the intricate interplay between employee benefits, valuation methodologies, and fiscal considerations is distinctly underscored by the process of perquisite valuation for rent-free accommodations. The equilibrium between augmenting the financial well-being of employees and sustaining government revenue emerges as a critical focal point.

The outcome of this evaluation reverberates in financial terms for individual employees as well as macroeconomic terms for the government, thereby necessitating a judicious and balanced approach to perquisite valuation in the realm of employee benefits.

THE SUMMARY
On August 19, 2023, the CBDT implemented modifications to the rules governing the determination of perquisite values related to residential accommodation provided by employers.
Starting September 1, 2023, adjustments have been made to the valuation of perquisites based on city populations. This shift is from 2001 to the 2011 census, and it involves updated benchmarks for population thresholds.
Reduction in the calculated value of rent-free accommodations as a perk would have two significant outcomes: firstly, it would result in actual cost savings for employees, and secondly, it would correspondingly lead to a reduction in government revenue.

Vikram Karuna is an Assistant Professor of Law and Coordinator of the Centre for Business Law and Taxation at Rajiv Gandhi National University of Law, Punjab, vikram_faculty@rgnul.ac.in

  • Published On Oct 6, 2023 at 03:21 PM IST

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