What is Rent-Free Accommodation (RFA): Taxability and Computation

If you're receiving the benefit of accommodation from your employer at a minimal price or without paying anything, you should know it's called a Rent-Free Accommodation (RFA) benefit, which is taxable. It implies that the value of RFA is included in your salary for tax purposes, just like regular income.

To enjoy this perk to the fullest, it is essential to understand the income tax on rent-free accommodation and how to do rent-free accommodation calculations to avoid any potential tax liabilities.

So, let’s understand everything about rent-free accommodation here. However, the value of RFA is taxed as a perquisite; let us first understand what a perquisite is.

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What is a Perquisite?

Perquisite is defined as any casual benefit provided as a work benefit in addition to salary or wages. In this case, it is the residential accommodation received by the employer free of cost or at a concessional rate from the employer. The value of perquisite is taxed under the head ‘Salaries’.

So, the benefit provided by the employer is taxable in the hands of the employee irrespective of whether the residential house is owned by the employer or on rent/lease.

This perquisite is important as it is considered for calculating the employee's total income at the time of filing an Income Tax Return.

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Now that we know the meaning of perquisite, let’s understand what rent-free accommodation is and what is the use of perquisite in rent-free accommodation benefit.

What is Rent-Free Accommodation?

Rent-free accommodation is a work-related benefit in which residence is provided by the employer to some employees as a part of their income, either for free or at a discounted price. It is taxable as per the requirements of the Income Tax Act.

Under RFA, employees enjoy the benefit of accommodation for personal use from their employer without paying much or anything at all.

Central and state government employees and salaried individuals who are not employed by the government, are eligible for the rent-free accommodation benefit.

Also, if the employee is employed with multiple employers simultaneously, then the total value of all the rent-free accommodation received by the employee will be taxable per the prevailing tax rules.

One can receive accommodation under RFA in any of the following forms:

Hotel
A flat
Service apartment
Guest House
Farmhouse or part thereof
Mobile home
Caravan
Ship or other floating structures

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What are the Types of Rent-Free Accommodation Offered?

All the government employees and some private employees (depending on their employer) receive rent-free accommodation in either of the following types:

Rent-Free Unfurnished Accommodation: In this case, the value of the perquisite is calculated depending on the location of the unfurnished property provided. Also, the perquisite value is different for property owned by the employer or on lease/rent, or if it is a hotel.
Rent-Free Furnished Accommodation: In this case, the property provided is equipped with furnishings like an air-conditioner, television, furniture, etc. The value of the perquisite is calculated in the same way as for unfurnished accommodation, however, an additional 10% of the original cost of the furniture is added per year.

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What are the New Rules for Rent-Free Accommodation Taxability?

The income tax levied is different for rent-free accommodation for central government employees, state government employees and private employees. It further depends on whether the accommodation provided is owned, on lease, rented or a hotel.

With effect from 1st September 2023, the Central Board of Direct Taxes (CBDT) has rolled out amendments to the Income Tax Rules for valuing perquisites of rent-free accommodation.

Under the new amendments as per the Finance Act, 2023, private sector employees who are provided with unfurnished rent-free accommodation will benefit from reduced valuation of perquisite.

Refer to the tables below for rent-free accommodation taxability for furnished and unfurnished accommodations.

Unfurnished Accommodation

For Central or State Government Employees

Ownership	New Rates (as per 2011 census)	Previous Rates (as per 2001 census)
Owned by Employer	Population - Above 40 lakhs Valuation - 10% of the salary is considered as the value of the house. Population - Between 15 lakhs and 40 lakhs Valuation - 7.5% of the salary is considered as the value of the house. Population - Less than 15 lakhs Valuation - 5% of the salary is considered as the value of the house.	Population - Above 25 lakhs Valuation - 15% of the salary is considered as the value of the house. Population - Between 10 lakhs and 25 lakhs Valuation - 10% of the salary is considered as the value of the house. Population - Less than 10 lakhs Valuation - 7.5% of the salary is considered as the value of the house.
On Rent or Lease	The perquisite value is based on the licence fee specified by the government.	The perquisite value is based on the licence fee specified by the government.

Note: Any charges recovered from the employee shall be deducted.

For Non-Government Employees

Ownership

New Rates (as per 2011 census)

Previous Rates (as per 2001 census)

Owned by Employer

Population - 40 lakhs
Valuation - 10% of the salary is considered as the value of the house.
Population - Between 15 lakhs and 40 lakhs
Valuation - 7.5% of the salary is considered as the value of the house.
Population - Less than 15 lakhs
Valuation - 5% of the salary is considered as the value of the house.

Population - 25 lakhs
Valuation - 15% of the salary is considered as the value of the house.
Population - Between 10 lakhs and 25 lakhs
Valuation - 10% of the salary is considered as the value of the house.
Population - Less than 10 lakhs
Valuation - 7.5% of the salary is considered as the value of the house.

On Rent or Lease

The perquisite value is lower of the following-

Actual lease rent paid by the employer; or

15% of the employee’s salary

The perquisite value is lower of the following-

Actual lease rent paid by the employer; or

10% of the employee’s salary

Note: Any charges recovered from the employee shall be deducted.

Furnished Accommodation

For Central or State Government Employees

Ownership	Tax Rates
Owned by Employer	The value of perquisite is equal to the value of unfurnished accommodation as per the city, with an increase of 10% every year for the cost of furnishing owned by the employer. If furnishing is hired from a third party, its actual charges are considered instead of 10%.
On Rent or Lease	The perquisite value is calculated the same as for unfurnished accommodation, with an addition of 10% increase every year for cost of furniture and other appliances.

Note: Any charges recovered from the employee shall be deducted.

For Non-Government Employees

Ownership	Tax Rates
Owned by Employer	The value of perquisite is equal to the value of unfurnished accommodation as per the city, with an increase of 10% yearly for the cost of furnishing owned by the employer. If furnishing is hired from a third party, its actual charges are considered instead of 10%.
On Rent or Lease	The perquisite value is calculated the same as for unfurnished accommodation, with an additional 10% increase every year for the cost of furniture and other appliances.

Note: Any charges recovered from the employee shall be deducted.

If Accommodation is Provided as a Hotel

If the rent-free accommodation is provided in a hotel exceeds 15 days in case of the transfer of the employee, then the rent-free accommodation taxability will be lower of:

The actual hotel charges paid to the hotel by the employer; or
24% of the employee’s salary

However, for a hotel stay not exceeding 15 days, there would be no perquisite value.

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How to Calculate Perquisite Tax on Accommodation Value?

For rent-free accommodation calculation, the following factors are taken into consideration:

If the property provided as RFA is owned, rented, or on lease.
Nature and price of furnishing used in the rent-free furnished accommodation.
The population of the city in which accommodation is provided.

Let us understand the rent-free accommodation calculation with the help of an example.

Let's assume Rahul is a private company employee working in a city of approximately 16 lakh population. His basic salary is ₹5,00,000, plus a dearness allowance of ₹10,000 and ₹5,000 as commission. So, his total salary comes out to be ₹5,15,000.

Rahul also receives rent-free unfurnished accommodation owned by his employer and rented at ₹30,000 per annum. So, the value of the rent-free unfurnished accommodation will be calculated in the hands of Rahul.

As per the new income tax rules on rent-free accommodation, Rahul needs to pay 10% of his salary as perquisite value. Thus, the taxable value of the perquisite is ₹51,500.

For rent-free accommodation calculation of furnished accommodation, the following formula can be used:

Taxable amount = Value of furnished accommodation + 10% cost of furniture or rent of furniture per annum

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How will Employees Benefit from the New Income Tax Rules?

As per the revised norms of income tax on rent-free accommodation provided by the employer, the TDS is likely to be lowered. The taxable value of the perquisite is also reduced, effective September 1, 2023, implying that employees will have to now pay less tax.

So, the lower value of perquisite will be added to the employee’s cost to the company (CTC) and taxed as per the relevant income bracket under the chosen tax regime opted for.

This means good news for employees receiving the RFA benefit, as they can now save more and get a higher take-home salary.

However, employees who do not earn substantial salaries may not be able to enjoy significant tax relief on RFA.

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When is Rent-Free Accommodation Not Taxable?

Here are the 3 following cases where the benefit of tax exemption is available on rent-free accommodation:

1. If the house is located at a remote location and the employee is working at a mining site, onshore oil exploration, project execution, dam, power generation site or an offshore site, it shall not be taxable if:

The size of the house is less than 800 sq. feet, and it is situated at least 8 km away from the local limit of a municipality or cantonment board.
The house is at least 40 km away from the nearest town with a population of less than 20,000.

2. The house shall not be taxable if it is allocated to:

A High Court or a Supreme Court Judge
An officer of Parliament
A Union Minister
A Leader of Opposition in Parliament
Serving Chairman/Members of UPSC.

3. If the accommodation is provided as a hotel for less than 15 days due to employee's transfer.

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What is the Difference between RFA and HRA?

If you are confused between Rent-free Accommodation (RFA) and House-Rent Allowance (HRA), here is a comparison between the two:

Factors	Rent-Free Accommodation	House-Rent Allowance
Meaning	It is a perquisite in which the employer provides accommodation to employees for residential purposes at discounted rent or no rent.	It is an allowance added to the employee’s salary that covers the actual house rent expenditure.
Components of Salary	Basic Salary DA Bonus Commission Taxable part of allowances	Basis Salary Dearness Allowance Percentage bases commission
Taxability	RFA taxability depends on the type of accommodation, ownership of the accommodation and whether it is furnished or unfurnished. The perquisite is calculated based on the population of the city the place is provided in, the employee’s actual salary, or the actual lease rent paid by the employer.	HRA is taxable as per the least of the following: HRA received is 50% of salary in metro city 40% in non-metro city The actual rent paid is 10% of the salary

Therefore, it's essential to understand the rent-free accommodation taxability and computation if you receive this type of benefit from your employer. You must know when the value of the perquisite will be included as a part of your taxable income, which could increase your tax liability, and when it is tax-free.

You can consult with a tax professional to leverage the benefit of RFA.

FAQs about Rent-Free Accommodation

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Who is eligible for rent-free accommodation?

Employees working under both central and state government employers get rent-free accommodation. Some private companies also offer the benefit of RFA to their employees.

What happens if the accommodation provided is not actually occupied?

If a house is provided as an RFA to the employee, it will be considered that an employee has availed of the perquisite. However, they may not have necessarily occupied the accommodation physically, and this will be taxable in the hands of an employee.

What happens to the RFA if an employee is transferred on their job?

Suppose an employee gets accommodation at their new place of posting while retaining their accommodation at their previous location. In that case, the perquisite with the lower value for less than 90 days will be taxed. After 90 days, the taxable value of the perquisite will be added to the employee’s salary.

What are the components of salary to calculate rent-free accommodation taxability?

Salary components include = Basic pay, Dearness Allowance, Bonus, Commission, taxable allowances, and other monetary taxable payments, excluding perks.

What is the primary difference between RFA and HRA?

Company-leased accommodation under RFA is valued as a perquisite as per the income tax rules in the hands of the employee. Whereas in the HRA, the rent paid by the employee is eligible for tax exemption per the prevailing HRA rules.

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What is Rent-Free Accommodation (RFA): Taxability and Computation

What is a Perquisite?

What is Rent-Free Accommodation?

What are the Types of Rent-Free Accommodation Offered?

What are the New Rules for Rent-Free Accommodation Taxability?

Unfurnished Accommodation

For Central or State Government Employees

For Non-Government Employees

Furnished Accommodation

For Central or State Government Employees

For Non-Government Employees

If Accommodation is Provided as a Hotel

How to Calculate Perquisite Tax on Accommodation Value?

How will Employees Benefit from the New Income Tax Rules?

When is Rent-Free Accommodation Not Taxable?

What is the Difference between RFA and HRA?

FAQs about Rent-Free Accommodation

Who is eligible for rent-free accommodation?

What happens if the accommodation provided is not actually occupied?

What happens to the RFA if an employee is transferred on their job?

What are the components of salary to calculate rent-free accommodation taxability?

What is the primary difference between RFA and HRA?

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