The calculation of RFA in income tax depends on who your employer is, whether the property is owned or leased by that employer, and where it sits on the map. For Central or State Government employees, the taxable perquisite is the license fee fixed by the government for that accommodation. For everyone else, it’s a percentage of salary — 10%, 7.5%, or 5% — set by the population of the city under the rules that took effect on 1 September 2023 through CBDT Notification No. 65/2023.1Press Information Bureau. CBDT notifies Rule for determination of value of perquisite in respect of residential accommodation provided by employer Rent-free accommodation is taxed as a perquisite under Section 17(2) of the Income Tax Act.2Indian Kanoon. The Income Tax Act, 1961 – Section 17(2)
What “Salary” Means in the Formula
Every non-government RFA formula uses “salary” as its base, and the term here is narrower than your total compensation. It includes your basic pay, dearness allowance to the extent it counts toward retirement benefits, taxable bonuses and commissions, and all taxable allowances received in cash. It does not include the value of other perquisites or the employer’s contributions to a provident fund. Isolate these components from your pay slip first; every calculation below fails if the base figure is wrong.
Government Employees
If you work for the Central Government or a State Government, the taxable value is the license fee fixed by your government body under its housing allotment rules.3Income Tax Department. Income Tax Department – Rule 15 It’s set administratively. Your salary level and the city’s population don’t enter the calculation. Subtract any rent you pay out of pocket, and what remains is the perquisite.
Non-Government Employees: Employer-Owned Housing
Private-sector and other non-government employees use a tiered percentage system based on the 2011 census population of the city where the housing is located.4Press Information Bureau. CBDT notifies Rule for determination of value of perquisite in respect of residential accommodation provided by employer
- Population above 40 lakh: 10% of salary
- Population between 15 lakh and 40 lakh: 7.5% of salary
- All other areas: 5% of salary
The percentage applies only for the portion of the year you actually occupied the accommodation. If you moved in or out partway through, pro-rate accordingly. Any rent you paid to the employer is then subtracted to arrive at the final taxable perquisite.
Non-Government Employees: Leased Housing
When the employer rents the property from a third-party landlord rather than owning it, the taxable value is the lower of two figures: the actual lease rent the employer pays, or 10% of your salary for the period of occupation.3Income Tax Department. Income Tax Department – Rule 15 Once you’ve picked the lower figure, deduct any rent you paid yourself.
Population tiering doesn’t apply to leased accommodation. The formula is the same whether the flat is in Mumbai or a small town.
Hotel Accommodation
If the employer puts you up in a hotel, the taxable value is the lower of the actual hotel charges the employer pays or 24% of your salary for the period of stay.3Income Tax Department. Income Tax Department – Rule 15 Anything you pay toward the bill yourself gets subtracted from the lower figure.
One carve-out matters: if you’re transferred from one location to another and the hotel stay totals 15 days or fewer in aggregate, the entire value is exempt.3Income Tax Department. Income Tax Department – Rule 15 Once the stay crosses 15 days, the exemption disappears and the full period is taxable.
Add-On for Furnished Accommodation
Where the housing comes furnished, you add a separate amount on top of the unfurnished value. If the employer owns the furniture, appliances, or fittings, add 10% per annum of their original cost. If those items are hired from a third party, add the actual hire charges the employer pays.
The add-on stacks directly on the base value. Say the base perquisite for an employer-owned flat in a city above 40 lakh works out to 10% of your salary, and the employer also owns furniture that originally cost ₹3 lakh. Add ₹30,000 to the base, then subtract any rent you paid.
Multi-Year Stay: The CII Cap
If you continue in the same employer-provided accommodation beyond the first year, the taxable perquisite for later years is capped at the lower of the value calculated under the normal formula or the first year’s value adjusted by the Cost Inflation Index.5Income Tax Department. Income Tax Department – Employees – Benefits allowable This stops the perquisite from climbing sharply just because your salary rose while you stayed put. The “first previous year” for this purpose is 2023–24 or the year the accommodation was first provided, whichever is later.6eGazette India. CBDT Notification No. 65/2023 – Income Tax (Eighteenth Amendment) Rules, 2023
Concessional Rent
Section 17(2)(ii) covers arrangements where the employer charges you a below-market rent instead of providing housing free.2Indian Kanoon. The Income Tax Act, 1961 – Section 17(2) Calculate the full perquisite value using the formulas above as if the accommodation were rent-free, then subtract what you actually paid. If the difference is positive, that’s the taxable perquisite. If your payment equals or exceeds the calculated value, no taxable benefit arises. A token rent doesn’t wipe out the liability; it reduces it by the amount paid.
Boundaries and Situations That Change the Answer
A few situations sit outside the standard formulas and are worth checking before you file.5Income Tax Department. Income Tax Department – Employees – Benefits allowable
- Accommodation at a mining site, onshore oil exploration site, or similar temporary project location in a remote area is not taxable, provided the housing itself is temporary in nature.
- Rent-free housing provided to High Court and Supreme Court judges, Union Ministers, the Leader of the Opposition in Parliament, certain parliamentary officials, and serving UPSC members is fully exempt.
- If you’re transferred and hold accommodation at both the old and new locations, only one is taxed for the first 90 days (your choice). After 90 days, both become taxable.
One overlap to watch: an employee receiving rent-free accommodation cannot also claim the House Rent Allowance exemption under Section 10(13A). The HRA exemption requires you to actually pay rent for the place you live in. If the employer provides the housing at no cost, there’s no rental expense to offset, and any HRA component in your salary becomes fully taxable. If you move into employer-provided accommodation mid-year, flag it with payroll so the HRA line is adjusted before the return is assessed.