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 received 1) HRA actually received
2) Rent paid in excess of 10% of salary for relevant period 2) Rent paid in excess of 10% of salary for relevant period
3) 50% of salary for relevant period 3) 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:

Particulars Am 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:

Particulars Am Rs Am Rs Am Rs
HRA Received 9,000.00
Less: Exemption u/s 10(13A) rule 2A (Least of following)
1) HRA actually received 9,000.00
2) Rent paid in excess of 10% of salary for relevant period
    Actual Rent Paid 10,000.00
    Less: 10% of salary (i.e10% of 54,000) 5,400.00 4,600.00
3) 50% of salary for relevant period (Since Mumbai) (i.e 50% of 54000) 27,000.00 4,600.00
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.N Circumstances In case of unfurnished accommodation In case of furnished accommodation
(1) (2) (3) (4)
1 Where 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
2 Where 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
3 Where the accommodation is provided by any employer, whether Government or any other employer, in a hotel. Not Applicable Lower 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:

Particulars Am 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 (since in receipt of Rent free accommodation)
Bonus (Annual Bonus / 12) 9,000.00
Fitment allowance 7,500.00
Prof updation allowance 2,000.00
Transport Allowance (Exempt u/s 10(14) upto Rs 1600 1,600.00
Other Taxable Allowance 3,900.00

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
Particulars Am 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 employee 500.00
Taxable Value of Rent free Accommodation 21,460.00

 

Salary for the purpose of Rent Free accommodation
Particulars Am Rs
Basic Salary 30,000.00
Dearness allowance 24,000.00
Commission Received 10,000.00
Bonus (Annual Bonus /12) 9,000.00
Fitment allowance 7,500.00
Prof updation allowance 2,000.00
Transport Allowance (Exmept u/s 10(14) upto Rs 1600
Other Taxable Allowance 3,900.00
Salary for the purpose of Rent Free accommodation 86,400.00

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:

Particulars Am 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
Bonus (Annual Bonus / 12) 9,000.00
Fitment allowance 7,500.00
Prof updation allowance 2,000.00
Transport Allowance (Exempt u/s 10(14) upto Rs 1600 1,600.00
Other Taxable Allowance 3,900.00

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 monthly Monthly Net Cash flow in case of (+ve inflow and -ve Outflow)
Case Monthly market rent HRA RFA (unfurnished) RFA (furnished) HRA RFA (unfurnished) RFA (furnished)
1 5,000 9,000 12,960 21,960 1,219 (5,224) (8,005)
2 5,400 9,000 12,960 21,960 819 (4,824) (7,605)
3 6,000 8,400 12,960 21,960 404 (4,409) (7,190)
4 6,585 7,815 12,960 21,960 0 (4,005) (6,786)
5 7,000 7,400 12,960 21,960 (287) (3,718) (6,499)
6 8,000 6,400 12,960 21,960 (978) (3,027) (5,808)
7 9,000 5,400 12,960 21,960 (1,669) (2,336) (5,117)
8 10,000 4,400 12,960 21,960 (2,360) (1,645) (4,426)
9 11,000 3,400 12,960 21,960 (3,051) (954) (3,735)
10 12,000 2,400 12,960 21,960 (3,742) (263) (3,044)
11 12,380 2,020 12,960 21,960 (4,004) (0) (2,781)
12 14,000 400 12,960 21,960 (5,124) 1,119 (1,662)
13 15,000 12,960 21,960 (6,000) 1,995 (786)
14 16,000 12,960 21,960 (7,000) 2,995 214
15 17,000 12,960 21,960 (8,000) 3,995 1,214

 

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
Particulars Am Rs
Basic Salary 30,000.00
Dearness allowance 24,000.00
Commission Received 10,000.00
Bonus (Annual Bonus /12) 9,000.00
Fitment allowance 7,500.00
Prof updation allowance 2,000.00
Other Taxable Allowance 3,900.00
Salary for the purpose of Rent Free accommodation 86,400.00

Taxable RFA in all the above 15 cases

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

Value of furnished Rent free Accommodation

Particulars Am 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
Total 21,960.00

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

S.N Particulars Case 1 Case 10 Case 15
A HRA Received 9,000 9,000 9,000
B Rent Paid (5,000) (12,000) (17,000)
C Salary for the purpose of HRA (Basic + DA) 54,000 54,000 54,000
D Rent Paid in excess of 10% of salary (i.e 10% of 54000) (400) 6,600 11,600
E 50 of salary (i.e 50% of C) 27,000 27,000 27,000
F Least of A , D and E 6,600 9,000
G Taxable HRA (A -F) 9,000 2,400
H Tax @ 30.90% on taxable HRA (2,781) (742)
I Net 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.N Particulars Case 1 Case 10 Case 15
A HRA amount that would have been Received 9,000 9,000 9,000
B Rent that would have been Paid (5,000) (12,000) (17,000)
C Saving of rent foregone (A-B) (4,000) 3,000 8,000
D Taxable value of RFA (unfurnished) 12,960 12,960 12,960
E Taxable value of RFA (furnished) 21,960 21,960 21,960
F Tax @ 30.90% on unfurnished RFA (30.90% of D) (4,005) (4,005) (4,005)
G Tax @ 30.90% on furnished RFA (30.90% of E) (6,786) (6,786) (6,786)
H Taxable HRA (From above Table) 9,000 2,400
I Saving of tax on Taxable portion of HRA (30.9% of H) 2,781 742
J Cash flow in case of unfurnished RFA (C+F+I) (5,224) (263) 3,995
K Cash 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.

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