Rent an apartment or take company leased accommodation?

The current employment trend has expanded the span of job opportunities for the youth. Young Indians often travel to new places in search of their dream job. Nesting in a new place requires them to look for rental accommodations. Sometimes they are provided company leased apartments as  part of their compensation package.

Rishi, a recent graduate of Indian Institute of Technology - Delhi, has bagged a great offer from a Mumbai-based multi national company.

He is now ready to leave his hometown in Bihar and join the professional league in Mumbai. As part of his CTC (cost to company), his company has given him an option to take company leased furnished accommodation.

However, his friend has advised him to go for an individual rented apartment instead. Rishi is now contemplating what he should do - take an apartment on rent in his name or take a company leased accommodation. Let us see how each option works for him.

Company leased accommodation:

A lease through the company is helpful especially in cases where employees, for short durations, are required to work from offices located in different cities or work from client's workplace. Employees are benefited with a ready accommodation in new destinations and it helps them settle down faster in the new place. The company is also at an advantage because the employee can concentrate on his new job without any hassle of settling in the new place.

So, if Rishi takes a company leased accommodation, he can save time and efforts on searching for rental properties, negotiating with the landlord, finding a lawyer to draw an agreement and register it etc. Since his employer is giving him a furnished apartment, he does not have to worry about purchasing a TV, household appliances, furniture etc.

Further, as it is in cases of most employer extended accommodation, Rishi's company has agreed to incur the costs of stamp paper, registration, broker's fees, security deposit etc.

Rishi's tax advisor informs him that a company-leased apartment is treated as a 'perquisite' (perk) under the income tax law of the country. The amount of the rent, treated as perk, is considered a part of salary and is taxable. The value of the accommodation is calculated as follows:

'15 percent of the salary' or 'actual rent paid by the employer plus the lease charges on furniture', whichever is lower.

The tax advisor asked Rishi for the following information to calculate the value of the taxable perk:

Rishi's annual salary:  Rs 700,000

Rent paid by the company: Rs 240,000 per annum for the apartment and Rs 0.48 lakh per annum for furnishings.

Value of the perk: Lower amount of the following:

15% of salary: 15% * 7.00 = Rs. 1.05L

OR

Actual rent paid by the employer plus the lease charges on furniture: 2.40 + 0.48 = Rs 288,000.

Hence, Rishi's taxable perk is Rs 105,000. This amount will be added to his 'income from salary' and taxed according to his income tax slab rate. For a tax rate of 30 per cent, the amount of tax payable on leased accommodation for Rishi is Rs. 31,500/-

Renting an apartment:

Rishi also has the option to rent the apartment himself. Naturally, he will have to incur the cost of registration fees, stamp duty, broker's fees etc and also pay the initial security deposit. Rishi asks his tax advisor to explain the tax effect of this option.

According to his tax advisor, the rent paid by Rishi is used to exempt the amount of HRA  (house rent allowance) component of salary from income tax. The amount of tax exemption is calculated as follows:

'Actual HRA received', or 'actual rent paid over ten percent of salary' or '50 percent of salary (40 percent non metro cities)', whichever is lesser.

The tax advisor asked Rishi for following information:

HRA component: Rs 200,000

Rent amount; Rs.25, 000 p.m. i.e., Rs. 300,000 per annum

So, the amount of exemption in Rishi's case is lesser of:

Actual HRA:  Rs 200,000

OR

Actual Rent - 10 per cent of salary : 3.00  – 0.70 = Rs 230,000

OR

50 % of salary: 50% * 7.00 = 3.50L

So, an amount of Rs 200,000 will be exempted from income tax if Rishi takes a rental accommodation himself. The tax savings, assuming the applicable tax rate to be 30 per cent is Rs 0.6 lakh. However, Rishi will also bear the brokerage fees, rent deposit etc. in this option.