Lease or let company rent a place for you?

The following is an exchange between me and a close friend of mine who recently had to shift to Delhi for a couple of years to execute a project for his company. Since the taxation related issues that he raised apply to taxpayers in general, I am reproducing our dialogue verbatim.

Here’s what my friend wrote.

Dear Sandeep,
As I have been discussing with you, finally it looks like I would have to move to Delhi for around two years. The main issue that concerns me is that of accommodation. Since this is a short-term assignment, I would need to lease a house. My company has very kindly offered me the option of either renting suitable premises on my own or providing me with one.

In the former case, I would be paying the lease rent and claiming the house rent allowance (HRA) deduction. On the other hand, if my company were to allot one to me, they would pay the lease rent themselves.

Now, my dilemma is to do with the tax impact of selecting either of these options. Upon speaking to a couple of people including my human resources department and doing some research on my own, I confess I am confused between the perquisite value and application of fringe benefit tax (FBT).

The following are the different opinions that I have got so far:

1. Perquisite value is 20%
of rent paid (and hence FBT is 33.66% of that = 6.73% of rent paid).

2. I should opt for company provided accommodation since the rent paid by the company would be taxed as FBT, which would be 6.73% of the total rent. Even if this FBT is recoverable from me, it would work out much better than paying rent myself and then opting for the HRA deduction.

3. If the employer were to provide me with accommodation, then the perquisite value would be 20% of salary in big cities like Mumbai/ Delhi. Therefore, it is much better to avoid this by leasing the apartment myself and claiming the full lease rent as the HRA deduction.

Also, another thought occurs to me. If I were to eventually opt for company provided accommodation, apart from the perquisite value, would the company also need to pay FBT? If so, such FBT may be recovered from me, thereby jacking up my effective rate of tax.

Given the above permutations and combinations, could you suggest the most tax optimal course of action?

 Here’s what I wrote back.

Dear Sanjay,
It seems to me that you would be better off leasing the place on your own. But before I explain why, there are a couple of concepts that you should be aware of.

Firstly, under the system of taxation, there is either perquisite tax payable or FBT but never both. In other words, on any item of expense, if FBT is payable by the employer, the same cannot be charged to tax once again as a perquisite to the employee and vice versa.

Secondly, as per a recent amendment, the perquisite value of company provided accommodation has been lowered to 15% of salary from the erstwhile 20%.

Now, if you were to opt for employer provided accommodation, the same is taxable as per the provisions of Sec. 17 and Rule 3 as a perquisite in the hands of the employee. The perk value in this regard (that will be added to salary), would be 15% of salary. “Salary” for the aforesaid purposes means basic salary, dearnes allowance (if applicable), bonus, commission, fees and all other taxable allowances (excluding the portions not taxable) and any monetary payment by whatever name called.

So basically, almost the entire salary will come into play for calculating the perquisite tax. Therefore, this would be like paying an extra tax of 5.1% (33.99% of 15%) over and above your existing tax payable which would be disastrous.

To put the above differently, employer provided accommodation, being a Category I perquisite, is not taxed as FBT in the hands of the employer but as a perquisite in the hands of the employee.
Therefore, it would be cheaper (tax wise) to lease the apartment on your own. But here too, note that the entire rent that you pay may not be eligible for tax deduction. The reason for this is that the HRA exemption regulated by rule 2A is the least of the following:

1. An amount equal to 50% of salary, where residential house is situated at Bombay, Calcutta, Delhi or Madras and an amount equal to 40% of salary where residential house is situated at any other place;

2. House rent allowance received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year;

3. The excess of rent paid over 10% of salary. “Salary” for the aforesaid purposes means basic salary and includes dearness allowance if terms of employment so provide.

Consequently, the entire rent paid may not be deductible. Even so, this deduction will serve to reduce your existing tax rate whereas under the alternative, the additional perk tax will actually increase it. Therefore, it would be best if you pay the rent yourself instead of asking your employer to pay for it on your behalf.