CA Srikant Agarwal

CA Srikant AgarwalFor salaried people most of the companies provide House Rent Allowances (HRA) and many companies also provide the facility of Rent free accommodation.

Many companies provide the facility of House Rent Allowance (HRA) and in case the employee opt for rent free accommodation facility then HRA is not allowed.

In this article we will make a comparative analysis as to which facility (whether HRA or Rent free accommodation) is a better one from monetary and Income tax perspective.

House Rent Allowance (HRA) Taxability

The total amount of HRA received is first included in income of the employee and then exemption u/s 10(13A) Rule 2A is allowed as below:

In case of metro cities (i.e Kolkata, Mumbai, Chennai and Delhi)Other Cities
Least of the following:Least of the following:
1) HRA actually received1) HRA actually received
2) Rent paid in excess of 10% of salary for relevant period2) Rent paid in excess of 10% of salary for relevant period
3) 50% of salary for relevant period3) 40% of salary for relevant period

Note: Here salary means = Basic + Dearness Allowance (if forms part of salary) + Commission (if based on fixed percentage of Turnover achieved)

For example: Mr X has following monthly salary structure:

ParticularsAm Rs
Basic Salary  30,000.00
Dearness allowance (all forming part of salary) say 80% of Basic  24,000.00
Commission Received (not based on fixed % of turnover)  10,000.00
House Rent Allowance (say 30% of Basic in Mumbai)    9,000.00

Mr X paid Rs 10,000 as rent per month for his accommodation.

In such a case the taxability of HRA (House Rent Allowance) will be as below:

Solution:

ParticularsAm RsAm RsAm Rs
HRA Received9,000.00
Less: Exemption u/s 10(13A) rule 2A (Least of following)
1) HRA actually received9,000.00
2) Rent paid in excess of 10% of salary for relevant period
    Actual Rent Paid10,000.00
    Less: 10% of salary (i.e10% of 54,000)5,400.004,600.00
3) 50% of salary for relevant period (Since Mumbai) (i.e 50% of 54000)27,000.004,600.00
Taxable HRA (monthly)4,400.00

Note: Since commission is not based on fixed % of turnover so it will not form part of salary for the purpose of computing exemption for HRA.

Rent Free Accommodation Taxability

The taxability of Rent free accommodation is as below:

S.NCircumstancesIn case of unfurnished accommodationIn case of furnished accommodation
(1)(2)(3)(4)
1Where the accommodation is provided by the Central Government or any State Government to the employees either holding office or post in connection with the affairs of the Union or of such State.License fees fixed by central or state Govt for the said accommodation
Less: Rent actually paid by the employee
Amount in column (3) as increased by
1) 10% of the original cost of furniture (like TV, Refrigerator, AC etc) (if furniture is owned by employer) or
2) Actual hire charges payable (if furniture hired by the employer)
Less: Charges paid by the employee for above furniture
2Where the accommodation is provided by any other employer
(a) where the accommodation is owned by the employer(a) 15% of salary in the cities with population of > 25 Lacs as per 2001 Census
(b) 10% of salary in the cities with population of > 10 Lacs but <=25 Lacs as per 2001 Census
(c ) 7.50% of salary in the other areas
Less: Rent actually paid by the employee
Amount in column (3) as increased by
1) 10% of the original cost of furniture (like TV, Refrigerator, AC etc) (if furniture is owned by employer) or
2) Actual hire charges payable (if furniture hired by the employer)
Less: Charges paid by the employee for above furniture
(b) where the accommodation is taken on lease or rent by the employer.Lower of the following:
a) Actual amount of lease rental paid or payable by the employer or
b) 15% of salary
Less: Rent actually paid by the employee
Same as above
3Where the accommodation is provided by any employer, whether Government or any other employer, in a hotel.Not ApplicableLower of the following:
a) actual charges paid or payable to such hotel, or
b) 24% of salary
Less: Rent actually paid by the employeeNo perquisite in case accommodation is provided for a period not exceeding 15 days on transfer of employee from one place to another.

Note: Here salary means =

1) Basic

2) Dearness Allowance (if forms part of salary)

3) Commission (whether based on fixed percentage of Turnover or not i.e all type of commission)

4) Bonus

5) Other Allowance to the extent they are taxable (i.e after excluding exemption u/s 10)

For example: Mr X is working with a private company which is providing rent-free accommodation to him in Mumbai (Population > 25 Lacs as per 2001 census).

Mr X has following monthly salary structure:

ParticularsAm Rs
Basic Salary30,000.00
Dearness allowance (all forming part of salary) say 80% of Basic24,000.00
Commission Received (not based on fixed % of turnover)10,000.00
House Rent Allowance (since in receipt of Rent free accommodation)
Bonus (Annual Bonus / 12)9,000.00
Fitment allowance7,500.00
Prof updation allowance2,000.00
Transport Allowance (Exempt u/s 10(14) upto Rs 16001,600.00
Other Taxable Allowance3,900.00

Such accommodation is owned by the company. The original cost of furniture provided along with accommodation is Rs 90,000. The age of these furniture is 3 years (on average). A nominal rent of Rs 500 is recovered from the employee on monthly basis.

Compute the amount of monthly perquisite in respect of rent free accommodation.

Solution:

The above case will fall under case 2 (a) i.e Where the accommodation is provided by any other employer and where the accommodation is owned by the employer

Taxable perquisite is as below:

Value of Rent free Accommodation
ParticularsAm Rs
15% of salary (i.e 15% of 86,400)12,960.00
10% of Original cost of Furniture (10% of 90,000)9,000.00
21,960.00
Less: Actual Rent Recovered from employee500.00
Taxable Value of Rent free Accommodation21,460.00

 

Salary for the purpose of Rent Free accommodation
ParticularsAm Rs
Basic Salary30,000.00
Dearness allowance24,000.00
Commission Received10,000.00
Bonus (Annual Bonus /12)9,000.00
Fitment allowance7,500.00
Prof updation allowance2,000.00
Transport Allowance (Exmept u/s 10(14) upto Rs 1600
Other Taxable Allowance3,900.00
Salary for the purpose of Rent Free accommodation86,400.00

Comparative analysis between HRA (House Rent Allowance) and RFA (Rent free Accommodation)

In case a private employer offers to choose between HRA and RFA, then prima facie RFA (Rent free Accommodation) appears to be cheaper and the best option. However from the net financial implication after considering the tax aspect RFA (Rent free accommodation) may turn out to be a costly one. Let’s understand it with an example:

For example: Mr X is working with a private company which provides an option to choose between HRA (House Rent Allowance) and RFA (rent-free accommodation) to him in Mumbai (Population > 25 Lacs as per 2001 census).

Mr X has following monthly salary structure:

ParticularsAm Rs
Basic Salary30,000.00
Dearness allowance (all forming part of salary) say 80% of Basic24,000.00
Commission Received (not based on fixed % of turnover)10,000.00
Bonus (Annual Bonus / 12)9,000.00
Fitment allowance7,500.00
Prof updation allowance2,000.00
Transport Allowance (Exempt u/s 10(14) upto Rs 16001,600.00
Other Taxable Allowance3,900.00

In case of RFA accommodation is owned by the company. The original cost of furniture provided along with accommodation is Rs 90,000. The age of these furniture is 3 years (on average). No rent is recovered from employee.

If he (Mr X) choose to opt for HRA (House Rent Allowance) then his HRA would be 30% of basic salary i.e Rs 9,000.

Determine which option should be chosen by Mr X. (Assume that Mr X falls in 30.9% tax bracket)

Solution:

In the above situation the best option depends upon the market rent applicable for the comparable accommodation.

This can be explained with the help of following table:

Taxable monthlyMonthly Net Cash flow in case of (+ve inflow and -ve Outflow)
CaseMonthly market rentHRARFA (unfurnished)RFA (furnished)HRARFA (unfurnished)RFA (furnished)
15,0009,00012,96021,9601,219(5,224)(8,005)
25,4009,00012,96021,960819(4,824)(7,605)
36,0008,40012,96021,960404(4,409)(7,190)
46,5857,81512,96021,9600(4,005)(6,786)
57,0007,40012,96021,960(287)(3,718)(6,499)
68,0006,40012,96021,960(978)(3,027)(5,808)
79,0005,40012,96021,960(1,669)(2,336)(5,117)
810,0004,40012,96021,960(2,360)(1,645)(4,426)
911,0003,40012,96021,960(3,051)(954)(3,735)
1012,0002,40012,96021,960(3,742)(263)(3,044)
1112,3802,02012,96021,960(4,004)(0)(2,781)
1214,00040012,96021,960(5,124)1,119(1,662)
1315,00012,96021,960(6,000)1,995(786)
1416,00012,96021,960(7,000)2,995214
1517,00012,96021,960(8,000)3,9951,214

 

From the above Table it is clear that in case of unfurnished RFA (Rent free accommodation) upto the market rent of Rs 9,000 (i.e case 7) claiming HRA is a better option since in case of HRA net cash outflow is Rs 1669 whereas in case of unfurnished RFA it is Rs 2,336. However when market rent is Rs 10000 or above, then opting for RFA is a better option.

In case of Furnished RFA upto the market rent of Rs 11000 (i.e case 9) claiming HRA is a better option since in case of HRA net cash outflow is Rs 3051 whereas in case of furnished RFA it is Rs 3735. However when market rent is Rs 12000 or above, then opting for RFA is a better option.

Note:
The detailed working of taxable HRA and RFA and net cash flow in case 1, 10 and 15 has been given below:

In all the above cases salary for the purpose of RFA (Rent free accommodation) is Rs 86,400. It has been worked out as below:

Salary for the purpose of Rent Free accommodation
ParticularsAm Rs
Basic Salary30,000.00
Dearness allowance24,000.00
Commission Received10,000.00
Bonus (Annual Bonus /12)9,000.00
Fitment allowance7,500.00
Prof updation allowance2,000.00
Other Taxable Allowance3,900.00
Salary for the purpose of Rent Free accommodation86,400.00

Taxable RFA in all the above 15 cases

Value of Unfurnished Rent free Accommodation
ParticularsAm Rs
15% of salary (i.e 15% of 86,400)12,960.00
 

Value of furnished Rent free Accommodation

ParticularsAm Rs
15% of salary (i.e 15% of 86,400)12,960.00
10% of Original cost of Furniture (10% of 90,000)9,000.00
Total21,960.00

Taxable HRA and net cash flow in case of HRA is as below:

S.NParticularsCase 1Case 10Case 15
AHRA Received9,0009,0009,000
BRent Paid(5,000)(12,000)(17,000)
CSalary for the purpose of HRA (Basic + DA)54,00054,00054,000
DRent Paid in excess of 10% of salary (i.e 10% of 54000)(400)6,60011,600
E50 of salary (i.e 50% of C)27,00027,00027,000
FLeast of A , D and E6,6009,000
GTaxable HRA (A -F)9,0002,400
HTax @ 30.90% on taxable HRA(2,781)(742)
INet Cash flow in case of HRA (A+B+H)1,219(3,742)(8,000)

Net cash flow in case of RFA (Rent free Accommodation) furnished and unfurnished is worked out as below:

S.NParticularsCase 1Case 10Case 15
AHRA amount that would have been Received9,0009,0009,000
BRent that would have been Paid(5,000)(12,000)(17,000)
CSaving of rent foregone (A-B)(4,000)3,0008,000
DTaxable value of RFA (unfurnished)12,96012,96012,960
ETaxable value of RFA (furnished)21,96021,96021,960
FTax @ 30.90% on unfurnished RFA (30.90% of D)(4,005)(4,005)(4,005)
GTax @ 30.90% on furnished RFA (30.90% of E)(6,786)(6,786)(6,786)
HTaxable HRA (From above Table)9,0002,400
ISaving of tax on Taxable portion of HRA (30.9% of H)2,781742
JCash flow in case of unfurnished RFA (C+F+I)(5,224)(263)3,995
KCash flow in case of furnished RFA  (C+G+I)(8,005)(3,044)1,214

The excel sheet which will help to calculate taxable HRA and RFA is attached along with net cash flow depending upon the applicable market rate prevailing for the comparable accommodation.

Hope salaried employees as well as employers from tax planning will find the above article and calculation sheet useful.

Download House Rent Allowance (HRA) &amp; Rent Free Accommodation Taxable Value Calculator

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