A guide to perquisite valuation under the Income Tax Act, 2025 and Rule 15 of the Income-tax Rules, 2026.
Most salaried employees know about House Rent Allowance and the exemption available when they pay rent out of their own pocket.
But what happens when the employer provides the accommodation directly — rent-free or at a concessional rate?
That is where the rules change completely.
When an employer provides accommodation to an employee — whether owned, leased, furnished, or in a hotel — it is treated as a perquisite under Section 17(1)(a) of the Income Tax Act, 2025. And perquisites are taxable.
Unlike HRA, there is no opting out based on your tax regime. The perquisite valuation applies under both the old and new tax regime.
This article explains how the valuation works across five common real-world scenarios.
Setting the Scene — Five Friends, One CA, One Saturday Brunch
Saritha hosted Saturday brunch at her place in Bengaluru.
Five friends were around the table — Arav, Bhargav, Chum, Dee and Ela. Filter coffee, warm conversation, and the question that always comes up when a CA is in the room.
Bhargav: “My company gave me a flat. I don’t pay any rent. Am I still getting taxed on it?”
Ela: “What about my hotel stay when I got transferred last month?”
Saritha smiled.
“It depends on who you work for, who owns the flat, whether it is furnished, and what you pay towards it. Let us go around the table.”
Arav — Government Employee
Scenario: Government-allotted flat in Bengaluru
Arav works for the Government of India. His department allotted him a flat in Bengaluru. He pays a licence fee of ₹3,000 per month as determined by his service rules.
For government employees, the taxable perquisite is not computed as a percentage of salary. Instead, it is the licence fee fixed by the Government under the relevant service rules, minus whatever the employee actually pays.
Taxable perquisite
Licence fee fixed by Government: ₹5,000/month
Less: Rent paid by Arav: ₹3,000/month
Taxable perquisite: ₹2,000/month, or ₹24,000/year
Arav then asked:
“What if the Government had rented the flat instead of owning it?”
Saritha’s answer: It does not matter. Whether the property is rented or owned by the Government, the same calculation applies. The valuation is based on the licence fee determined under service rules, minus what the employee pays.
Bhargav — Private Company, Employer-Owned Furnished Flat
Scenario: Company-owned furnished flat; employee pays nothing
Bhargav’s private company owns the flat in Bengaluru and furnishes it with furniture worth ₹2,00,000. He pays nothing towards rent.
His salary for perquisite valuation purposes — basic + DA + special allowances + other taxable allowances — is ₹50,000/month, or ₹6,00,000/year.
For employer-owned accommodation in a non-government company, the perquisite is a percentage of salary based on city population:
- Population over 40 lakh — 10% of salary
- Population between 15 and 40 lakh — 7.5% of salary
- Population below 15 lakh — 5% of salary
Bengaluru has a population over 40 lakh, so 10% applies.
Step 1 — Accommodation perquisite
10% of ₹6,00,000 = ₹60,000
Step 2 — Furniture perquisite
10% of ₹2,00,000 = ₹20,000
Total taxable perquisite: ₹80,000/year
Bhargav asked:
“What if my employer only hired the furniture instead of buying it?”
Saritha explained that the actual hire charges paid by the employer are added instead of 10% of the furniture cost. If the hire charges are ₹3,000 per month, ₹36,000 per year would be added to the perquisite.
Chum — Employer-Leased Flat and the Second-Year CII Surprise
Scenario: Company leases a flat for two years; employee pays nothing
Chum’s employer leases a flat for her in Bengaluru at ₹8,000 per month, or ₹96,000 per year. She pays nothing towards rent.
For employer-leased accommodation, the taxable value is the lower of:
- Actual lease rent paid by the employer; or
- 10% of salary;
minus any rent paid by the employee.
Year 1
Lower of:
- Actual lease rent: ₹96,000
- 10% of salary: ₹60,000
Taxable perquisite: ₹60,000/year
Chum has been in this flat for two years. She assumed her employer would continue using the same ₹60,000 value in Year 2.
Saritha explained that, for subsequent years, the taxable value is the lower of the value computed normally for that year or the Year 1 value adjusted using the Cost Inflation Index (CII).
Note: CII refers to the Cost Inflation Index notified by the Central Government each year. The source explains that this provision prevents the perquisite value from rising faster than inflation when the same accommodation is retained.
Dee — Concessional Accommodation and the Transfer Twist
Scenario: Employee pays ₹2,000/month and is transferred from Pune to Bengaluru
Dee’s company owns the flat in Bengaluru. She pays ₹2,000 per month towards it.
Normal taxable perquisite
10% of ₹6,00,000 − ₹24,000 = ₹36,000/year
The lower the rent recovery, the higher the perquisite. Every rupee paid by the employee reduces the taxable amount.
The transfer twist — dual accommodation beyond 90 days
Dee was transferred from Pune to Bengaluru. Her employer provided accommodation in both cities, while her family remained in the Pune flat for 150 days before moving.
The source explains the treatment as:
- First 90 days: only the lower-valued accommodation is taxable.
- Beyond 90 days: both the Pune and Bengaluru accommodations become taxable simultaneously.
Dee asked:
“So for 60 days my family was taxed on two houses?”
Saritha replied:
“Yes. The law gives you a 90-day window. If possible, plan your family’s transition to complete within it.”
Ela — Hotel Accommodation on Transfer and the 15-Day Rule
Scenario: Company books a hotel for 40 days on transfer
Ela was transferred to Bengaluru. Her company booked her into a hotel for the first 40 days while she found permanent accommodation.
The source explains a specific treatment for hotel accommodation on transfer:
- Stay of 15 days or less: NIL perquisite.
- Stay beyond 15 days: taxable perquisite arises.
When taxable, the formula described in the source is:
Lower of actual hotel charges paid by the employer OR 24% of salary, minus any amount paid by the employee.
Ela asked:
“So 15 days would have been completely free?”
Saritha replied:
“Yes. Now the formula applies on the 40 days.”
Interpretation note: The source notes that, on a strict reading of the rule, once the stay exceeds 15 days, the formula applies to the full period of accommodation. It also notes that different professional interpretations exist and recommends obtaining advice for the specific situation.
For this purpose, the source states that “hotel” includes licensed accommodation in the nature of a motel, service apartment or guest house under Rule 15(8)(d) of the Income-tax Rules, 2026.
Quick Reference — Perquisite Valuation at a Glance
| Scenario | Formula / Rule | Notes |
|---|---|---|
| Government employee | Licence fee as per service rules − rent paid | Same treatment whether Government owns or rents the property |
| Non-Government owned — population over 40 lakh | 10% of salary − rent paid | Source lists Bengaluru, Delhi, Mumbai, Chennai, Kolkata, Pune, Hyderabad and Ahmedabad |
| Non-Government owned — population 15–40 lakh | 7.5% of salary − rent paid | — |
| Non-Government owned — population below 15 lakh | 5% of salary − rent paid | — |
| Non-Government rented / leased | Lower of actual lease rent or 10% of salary − rent paid | From Year 2 onwards, source notes CII indexing |
| Hotel accommodation — stay beyond 15 days | Lower of actual hotel charges or 24% of salary − rent paid | Hotel includes licensed motel, service apartment or guest house |
| Furnished accommodation add-on | 10% p.a. of employer-owned furniture cost OR actual hire charges | Added to accommodation perquisite |
| Hotel on transfer — stay ≤15 days | NIL | Source describes the 15-day rule as a gate |
| Two accommodations on transfer — ≤90 days | Only lower-valued accommodation taxable | Beyond 90 days, source states both become taxable |
A Note on “Salary”
The definition of salary used for computing accommodation perquisite is different from the definition used for HRA exemption.
For the purposes discussed in the source, salary includes Basic Pay + DA where applicable for retirement benefits + taxable allowances + bonus.
PF contributions, exempt allowances and perquisites are excluded.
Key Takeaway
Rent-free accommodation perquisite is treated differently from HRA.
The tax outcome depends on factors including:
- the type of accommodation;
- city population;
- whether the accommodation is furnished;
- whether the employer owns or leases it;
- whether it is connected with a transfer; and
- how much the employee contributes towards it.
This article covers selected scenarios for illustrative and educational purposes. Perquisite valuation can involve additional nuances, including city-population thresholds, multi-year CII indexing, remote-site exemptions and interpretation of hotel-stay provisions. The examples above are simplified illustrations and should not be treated as personalised tax or legal advice. A qualified tax professional should be consulted for a specific situation.