Amendment in valuation of perquisitevalue of Rent-Free Accommodation

Income Tax (Eighteenth Amendment), Rules, 2023

Notification No. 65/2023/F.No. 370142/21//2023

About Section 17 of the Income Tax Act, 1961 (‘the Act’)

Section 17 of the Act deals with the definition of salary, perquisites, and profits in lieu of salary. The provisions of subsection 2 of Section 17 of the Act provide that rent – free accommodation provided to the employee by his employer will be taxable in the hands of the employee as perquisite.


The Finance Act of 2023 brought certain amendments for calculation of perquisite value of rent-free accommodation provided by employers to its employees. Now, the CBDT has modified Rule 3 of the Income Tax Rules, 1962 to accommodate such changes. The amended rule provides detailed guidelines for determining the perquisite value of rent– free accommodation in various scenarios. Such amendments have been summarized hereunder for better understanding –

First Amendment – Valuation of perquisite

The CBDT has amended the mechanism to calculate the perquisite value in case of employers other than Central or State government. The earlier rules provided for a certain percentage of salary to be the perquisite value of the rent – free accommodation. According to the rule, the value of perquisite varied based on population of a city where the accommodation is situated. Now, such percentage has been amended along with the change in census from 2001 to 2011 with effect from 01.09.2023. The comparison between the rates before 01.09.2023 and after 01.09.2023 has been mentioned in the table below for better understanding –

Population of CityPerquisite Value (In case of unfurnished accommodation by non-government employees)
Before 01.09.2023On or after 01.09.2023
Below 10,00,0007.5% of Salary5% of Salary
10,00,000 to 14,99,99910% of Salary
15,00,000 to 24,99,9997.5% of Salary
25,00,000 to 40,00,00015% of Salary
Above 40,00,00010% of Salary

Second Amendment

Where the same accommodation is continued to be provided to the same employee for more than one year, the valuation in subsequent years will not exceed the first year’s valuation adjusted by the Cost Inflation Index. In this context, the “first year” means the financial year 2023-2024, or the financial year in which the accommodation was provided to the employee, whichever, is later. Thus, the perquisite value of rent-free accommodation in the subsequent years shall be lower of the following:

▪ Perquisite value computed as per the rules
▪ First year’s perquisite value as adjusted by the Cost Inflation Index (CII)

To understand the amendments made vide this notification, an elaborative example has been mentioned below for better understanding –


Scenario 1 (First Amendment): Mr. Shyam (an employee) lives in a city having a population of 20,00,000 and his employer provides him with unfurnished accommodation throughout the financial year 2023-24. His monthly salary is Rs. 50,000. Compute the perquisite value of rent-free accommodation.
Scenario 2 (Second Amendment): Suppose Mr. Shyam gets promoted and his monthly salary is increased to Rs.1,00,000. He continues to occupy the same property in the financial year 2024-25 as well. Compute the perquisite value of rent-free accommodation assuming Cost Inflation Index for financial year 2023-24 is 348 and for 2024-25 is 370.

The perquisite value shall be computed as under:

Scenario 1

Particulars01.04.2023 to 31.08.202301.09.2023 to 31.03.2024
Population of city      20,00,000      20,00,000
Monthly salary (A)          50,000          50,000
No. of months for which accommodation is provided (B)5 months7 months
Salary for relevant period (C = A * B)       2,50,000       3,50,000
Valuation rate (D)10%7.50%
Perquisite value for relevant period (E = C * D)          25,000          26,250
Total perquisite value of rent-free accommodation                                 51,250

Scenario 2

In this scenario, the perquisite value of rent-free accommodation based on Mr. Shyam’s salary shall be Rs. 90,000 (Rs. 1,00,000 * 12 months * 7.5%). However, this value cannot exceed the perquisite value of the Financial Year 2023-24 (calculated in scenario 1) as adjusted by Cost Inflation Index.
The adjusted perquisite value of the financial year 2023-24 shall be Rs. 54,490 (Rs. 51,250 / 348*370).
Thus, the perquisite value for the financial year 2024-25 shall be Rs. 54,490 (i.e., lower of Rs. 54,490 or Rs.

SW Point of View:The amendment will result in reduction in the perquisite value of rent-free accommodation leading to significant savings for employees. While on the other hand, it will result in a corresponding decrease in government revenue. This is beneficial for employees receiving expensive accommodation. Lower-income employees with more modest accommodation might not experience significant tax relief.

Virendra Vikram, Tax Associate, SW India