Quiz for the week (03 Mar 2025):

Satish is Vice-president (Marketing) in ABC Co Ltd since 1^st April,2022. He was paid basic salary of Rs. 2 lakhs per month and dearness allowance equal to 60% of salary in financial year 2022-23. For FY 2023-24 his salary was with increment of 20% (i.e.) Basic pay Rs. 2,40,000 p.m. plus DA @60% thereon; and for FY 2024-25 with another increment of 20% (i.e) Basic pay Rs.2,88,000 p.m plus DA @60% thereon. He was provided rent-free unfurnished accommodation in Chennai from 1^st April,2023. The population of Chennai as per 2011 census exceeded 40 lakhs. He occupies the same premises during the entire financial year 2024-25. Compute the perquisite value of rent-free accommodation for the assessment year 2025-26.      

Best Answer :

The query posed does not require computation of salary income but requires computation of perquisite value of accommodation provided to the employee by the employer.

As per rule 3 where the accommodation is provided by any other employer (other than Central or State Government) and the accommodation is owned by the employer, 10% of salary shall be the value of perquisite where the accommodation is in cities having population exceeding 40 lakhs as per 2011 census. This is applicable w.e.f. 01.09.2023.

Prior to its substitution by Income-tax (Eighteenth Amendment) Rules, 2023 where the accommodation is provided by any other employer (other than Central or State Government) and the accommodation is owned by the employer, 15% of salary shall be the value of perquisite where the accommodation is in cities having population exceeding 25 lakhs as per 2001 census.  This is applicable up to 31.08.2023.

Third proviso to rule 3(1) of the Income-tax Rules, 1962 says that where the accommodation is owned or taken on lease or rent by the employer and the same accommodation is continued to be provided to the same employee for more than one previous year, the amount of perquisite value shall not exceed the amount so calculated for the first previous year, as multiplied by the amount which is a ratio of the cost inflation index of the previous year for which the amount is calculated and the cost inflation index for the previous year in which the accommodation was initially provided to the employee.

In this case, the accommodation of the financial year 2023-24 will have two step computation as per rule 3 up to 31.08.2023 and as per the substituted rule 3(1) from 01.09.2023. After computing the said perquisite value, it has to be indexed by applying the cost inflation index of the financial year 2024-25 taking the financial year 2023-24 as the base year.

Since the employee is continuing to occupy the same accommodation the perquisite value of the base year i.e. F.Y.2023-24 is computed first.  As per the third proviso to rule 3(1) the cost inflation index is applied to restrict the value of perquisite to such amount.

The perquisite value when computed on the salary of F.Y.2024-25 as per rule 3(1) would be @10% of the basic pay + DA being Rs.2,88,000 + Rs.1,72,800 = Rs.4,60,800 X 10% X 12 (months) would be Rs.5,52,960.

Since the perquisite value for F.Y.2024-25 computed on the salary of that year Rs.5,52,960 is less than the perquisite value of base year i.e. F.Y.2023-24 (Rs.5,80,800), the perquisite value for the assessment year 2025-26 would be Rs.5,52,960.