Company Accommodation Versus Personal Home: Let Your Pocket Decide

Horizons of job opportunities are fast widening and young professionals need to often travel to new places in search of desired jobs. With millions of young men and women joining the country's workforce each year, finding for them accommodation in their cities of work has in itself become a thriving industry.

As part of CTC (cost to company), many firms give their employees the option to take company-leased accommodation. Often, employees are deputed to different places for short durations, and having ready accommodations at new places helps them settle faster. By going for a company-leased accommodation, the employees don't have to go through the trouble of searching rental properties, hectic paper work for agreement, and finding brokers.

However, many employees opt for individual rented apartments. We look at which of the two options is more beneficial from an employee's perspective.

Taxing matters

A key factor that makes a lot of difference here is tax. A company-leased apartment is treated as a 'perquisite' (perk) under the income-tax law of the country. Thus, the rent amount, considered part of the salary, is taxable. If your employer is giving a furnished apartment, you don't have to worry about purchasing household appliances and furniture, etc. Most employers also agree to incur the cost of stamp duty, registration, broker's fee, security deposit, etc.

For example, if you go for an apartment in Mumbai, a major part of your salary will be spent on paying the rent. You also have to bear initial costs of leasing a home such as the registration fee, stamp duty, broker's fee and security deposit.

However, you are able to claim a tax exemption based on your rent expense.

If you are a salaried employee receiving a house rent allowance (HRA) and are staying in a personal accommodation on rent, you can claim a tax exemption in lieu of the same under Section 10 (13A) of the Income Tax Act. Those who are self-employed are also eligible for tax deductions under the Section 80 GG of the Income Tax Act.

The calculation

For a company-leased accommodation, the tax that you have to pay depends on these two parameters, whichever is less: 

A. 15 per cent of your salary
B. Actual rent paid by the employer, plus the lease charges on furniture

Now, suppose your annual salary is Rs 6,00,000 and the rent paid by the company for the apartment is Rs 3,00,000, including furnishing. According to the income-tax slab, of the total amount, Rs 90,000 would be taxable. For a tax rate of 30 per cent, the amount of tax payable on a leased accommodation is Rs 27,000.

For a rented apartment, the amount of tax exemption is calculated considering the lowest of the three options below:

A) The actual HRA received; or
B) The actual rent paid minus 10 per cent of your basic pay; or
C) 50 per cent of your basic salary for people living in metro cities, and 40 per cent of basic salary for people living in non-metros

Now, suppose your salary is Rs 6,00,000 and your HRA is Rs 300,000. Supposing you pay an annual rent of Rs 3,00,000 and applying the above three options, we get

Option 1: The actual HRA: Rs 3,00,000

Option 2: Actual rent paid minus 10 per cent of the basic salary = Rs 3,00,000 - 60,000 = Rs 2,40,000

Option 3: 50 per cent of the salary = Rs 3,00,000

As we can see, the second option is the lowest among the three, an amount of Rs 2,40,000 will come under the exemption bracket, if an individual takes a rental accommodation. So, the tax savings in this case, assuming the applicable tax rate to be 30 per cent, is Rs 72,000 (30 per cent of 2,40,000). However, the caveat here is that you will also bear the brokerage fees, rent deposit, etc, if you choose this option.

So, before deciding on whether you want to rent an apartment or opt for a company-lease arrangement, take the time to calculate which option will be most cost-effective for you.