Tax wise, it’s best to lease the house yourself --- Sandeep Shanbag

Wednesday, 15 December 2010 

As I have been discussing with you, finally it looks like I would have to move to Delhi for around two years.

The main issue that concerns me is that of accommodation. Since this is a short-term assignment, I would need to lease a house. My company has very kindly offered me the option of either renting suitable premises on my own or they are willing to provide me with one. In the former case, I would be paying the lease rent and claiming the HRA deduction. On the other hand, if my company were to allot one to me, they would pay the lease rent themselves. Now, my dilemma is to do with the tax impact of selecting either of these options.
Upon speaking to a couple of people including my HR, and doing some research on my own, I confess I am more confused. Some of my questions are:

What is meant by perquisite value? Some say it is 20% and yet others maintain it is 15%

 Earlier, there used to be this system of fringe benefit tax (FBT) where the FBT paid by the company used to be recovered from the employee. Will the same principle be applicable in the case of perquisite tax?

 If I opt for paying the rent myself, is the entire rent deductible? If not, what amount is deductible?

Given the circumstances, could you suggest the most tax optimal course of action?

Dear Sanjay, 
It seems to me that you would be better off leasing the place on your own. But before I explain why, there are a couple of concepts that you should be aware of.

Firstly, under the present system of taxation, FBT is no longer applicable. The same has been replaced by perquisite based taxation.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 resort to the practice of recovering the FBT paid from the employee. However, now, since perquisites (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 (before FBT was introduced) the perquisite value of company provided accommodation used to be 20% of salary or lease rent paid, whichever was lower, as per a recent amendment, such perquisite value has been lowered to 15% of salary.

So now, if you were to opt for employer-provided accommodation, the same is taxable as per the provisions of Section 17 and Rule 3 as a perquisite in the hands of the employee.

The perk value in this regard (that will be added to salary), would be 15% of salary. “Salary” for the aforesaid purposes means basic salary, DA (if applicable), bonus, commission, fees and all other taxable allowances (excluding the portions not taxable) and any monetary payment by whatever name called.

So basically, 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% (30.9% of 15%) over and above your existing tax payable which would be disastrous.

Therefore, it would be cheaper (tax wise) to lease the apartment on your own. But here too, note that the entire rent that you pay 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:

 An amount equal to 50% of salary, where residential house is situated at Mumbai, Kolkata, Delhi or Chennai and an amount equal to 40% of salary where residential house is situated at any other place.

 House rent allowance received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year

 The excess of rent paid over 10% of salary.
“Salary” for the aforesaid purposes means basic salary and includes dearness allowance 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.