House Rent Allowance (H.R.A.) results in tax savings because accounting under Income tax act is direct exemption based. However, accounting of Rent Free accommodation is valuation based taxation and added to total income of employee presumptive basis.

The principles of valuations are explained below:-

House Rental allowance(Section 10(13A) of Income tax act, 1961 &

Rule 2A of Income Tax rules, 1962)

Rent Free accommodation(Rule 3(1) of Income Tax rules, 1962
Components of salary:

  • Basis Salary.
  • Dearness Allowance (Only the DA which forms part of the salary).
  • Percentage bases commission.

 

 

 

 

 

Components of salary:

  • Basis Salary.
  • Dearness Allowance (Only the DA which forms part of the salary).
  • All allowance to the extent taxable.
  • Leave salary received during employment.
  • Bonus (on receipt basis)
  • Commission (both Percentage based as well as fixed commission)
Extent of taxation:-Exemption based:- HRA is taxable if received more than least of the following :

  • H.R.A received
  • 50% of salary
  • Rent Paid – 10% of salary

Examples:-

  • If the rent paidis zero, exemption will be zero and whole HRA received will become taxable.
Extent of taxation:-No separate exemption under this,

Least of the following is taxable

(In case accommodation is hired by the employer) :

  • Hire charges

OR

  • 15% of Salary
Conclusion:- Taxability under this is dependent upon the following factors:

  • R.A received
  • Rent Paidby the employee for hiring the accommodation out of HRA received.
  • Salary Computedfor this purpose.

 

Conclusion:-Taxability under this is dependent upon the following factors:

  • Hire charges paid for the accommodation by the employer.
  • Salary computed for this purpose.

 

Now, above factors may help a good tax planning tool for the employees and CTC planning for employer. In the following examples we shall explain this. Total outflow of the employer assumed to be Rs. 100/-

 

House Rental Allowances RENT FREE accommodation
Basis salary                       = Rs. 50/-HRA                                   = Rs. 25/-

Other allowances             = Rs. 25/-

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Computation of Taxable HRA

HRA received                     = Rs. 25/-

Deduction will be least of the following:

50% of salary i.e. Rs. 25/-

HRA received i.e. Rs. 25/-

Rent Paid – 10% of salary i.e.

Rs. 25 – Rs. 5 = Rs. 20/-

The taxable HRA comes out to be Rs. 5/-

Income under the head salary = Rs. 80/-

Basis salary                       = Rs. 50/-RFA(Hire charges paid)   = Rs. 25/-

Other allowances             = Rs. 25/-

 

Computation of Taxable RFA

No tangible receipts to employee.

 

Least of the following will be taxable:

15% of salary i.e. Rs. 11.25/-

OR

Hire charges i.e. Rs. 25/-

The taxable RFA comes out to be Rs. 11.25/-

Income under the head salary = Rs. 86.25/-

Analysis and fund planning:-

total CTC of the employee (or outflow of employer) in both the cases will be Rs. 100/-

House Rental Allowances RENT FREE accommodation
Income taxable under the head salary : Rs. 80/-.Extra income that can be avoided from being taxed: Rs. 6.25/-.

So it’s a tax advantageous.

Income taxable under the head salary : Rs. 86.25/-.Extra income that is taxed: Rs. 6.25/-.

So the taxes disadvantage.

By: SensysTechnologies

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One response to “HRA Vs. Rent Free Accommodations (RFA)”

  1. Dalip Sharma says:

    Respected Sir,

    I am working in a nationalized bank as Chief Manager in Scale-IV.

    I am staying at Gurgaon and paying monthly rent of Rs.26875.00

    to my landlord.

    My entitlement as per bank’s norms is Rs. 13500/= and remaining

    Rs. 13375/= is deducted from my salary for making payment to the landlord.

    Apart from this, perquisite Value of the RFA is also added back to my income and taxed accordingly.

    My Gross salary is Rs. 100000.00 per month. and HRA Rate is 9.5% for us in Metro area.

    My query is :

    Can I claim excess amount of Rs.13375/- per month being paid by me out of my pocket under ” House Rent Paid”.

    regards

  2. Dr S S Pandey says:

    good morning
    sir i am central government employee. living in government quarter. HRA is deducted in salery. can HRA calculate income. or it is taxable.

  3. Mik says:

    Facts:

    I stay in a company owned house.

    I get HRA of Rs.50,000 per month

    I pay Rs. 23,000 per month as rent to the company (which is the market rate – so technically it is not a rent free accommodation)

    However, my employer treats it as a rent free accommodation, calculates the perquisite, deducts the rent recovered, and taxes the balance.

    Also, my HRA remains fully taxable.

    In my opinion, when I am paying market rent for the house to my employer, it should not be considered as a RFA and I should get benefit of HRA Exemption also.

    Please advise.

  4. Saurav says:

    What is the eligibility to claim RFA ?
    Can an employee claim the benefit of RFA instead of HRA if he is receiving HRA as one of the component of his salary ?

    Kindly treat it as urgent.

  5. AKASH VAJPAI says:

    For tax related any query you can mail me @akashvajpai24@gmail.com. Answer will be given in 24 hours.

  6. SWAPAN SARKAR says:

    The Income tax laws for rent free accomodation not justified. The employee provided accomodation on for the employment purpose & tax laws penalised them heavily.This laws should be reviewd.

  7. Somu B M says:

    Dear Sir,
    Greetings of the day.

    Please explain how to calculate for wholly & Partly Let Out house property.
    Ex: Mr. X has loan of Rs. 1cr
    Interes payable(PEMI Interest) 750000/-
    Rent receiving per month Rs.25000/-

    Regards,
    Somu B M.

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