Ajay is working in some company and company asks him to move to Mumbai for a period of 2 years for a newly developing project of the company. Ajay is in a fix about the expenses in Mumbai as well as the accommodation. The main problem for the Ajay was about taking home on rent and how to claim the deduction on the home rent.
His employer gives him two options.
- Rent a place
- They will provide him the place.
Ajay was told that as if he rent a place in Mumbai, the company will suitable adjusts salary and he can claim the house rent allowance whereas if he chooses the second option, the salary will be the same and he needn’t to pay the home rent. But Ajay is confused about the tax implication in both these cases as which is more beneficial in the tax regard?
Ajay is confused and these are the questions in his mind.
1- What is suitable adjust salary?
2- What is perquisites value?
3- What is difference between perquisites value and fringe benefit tax?
4- What amount is available for deduction in income tax in both the cases?
Ajay knows that in both the cases he needn’t to pay the home rent from his pocket. But the confusion is to get the maximum tax benefit out of it in these two options.
So Ajay has chosen rent a place on his own and not having the place which company provides. The reasons for his decision are as follows.
1- Fringe benefit tax is no longer applicable in the current taxation system of India.
2- Fringe benefit tax is replaced by the perquisites tax which is in the hands of employees and not the employer which used to be in FBT tax.
3- So employer cannot recover the perquisites tax from the employees.
4- The perquisites value of the accommodation (before the FBT rule) was 20% of the salary or lease rent paid whichever is lower. The perquisites was also reduced to 15% (to the cities having population exceeding 25 lakhs), 10% (to the cities having population 10-25 lakhs) and 7.5% to the cities having population less than 10 lakhs.
5- If Ajay chooses the home which the company provides, the all amount would come in the taxable income as per section 17(Rule 3) of income tax act. In this case the perquisites value would be 15% of the salary.
In calculating the taxable income all salary components like basic salary, dearness allowance, bonus, fees, commission and other perquisites and monetary payments will be added. So if Ajay chooses to take home for the company provides he needs to pay 4.64% more tax to the current tax liability. (30.9% of 15)
However if Ajay choose to rent a place on his own, not the entire rent amount is eligible for deduction. The rule 2A of income tax act says that in the case of house rent allowance the deduction is available as follows.
50% of the salary in metro cities including Delhi, Mumbai, Kolkata or Chennai.
40% of the salary in other places.
So if not all rent is available for deduction, there is some relief in the income tax act for leased accommodation occupied by the employer. So not in all cases but lease rent is beneficial in the tax point of view.