CA Lalit Kumar

Analysis of House Rent Allowance (HRA) Vs. Rent Free Accommodations (RFA)

In case the House Rent Allowance (H.R.A.) is provided then there will be a tax savings (Please refer Valuation sheet for details). The above mentioned savings is mainly because of the methods Income tax act and Rules employs for valuation of taxability of H.R.A and Rent Free Accommodations (R.F.A.). The main components are explained with the help of a table given 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
Salary for this purpose consists of following components:

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

In this whole H.R.A received is taxable subject to the deduction of least of the following :

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

Please note if the rent paid is zero, exemption will be zero and whole HRA received will become taxable.

Taxability under this is dependent upon the following factors:

  • H.R.A received
  • Rent Paid by the employee for hiring the accommodation out of HRA received.
  • Salary Computed for this purpose.

 

v  Salary for this purpose consists of following components:

  • 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)

v  There is 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

Taxability under this is dependent upon the following factors:

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

 Let us explain with the help of an example:  Total outflow of the employer assumed to be INR 100/-

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

Other allowances             = INR 25/-

Computation of Taxable HRA

HRA received                     = INR 25/-

Deduction will be least of the following:

  • 50% of salary i.e. INR 25/-
  • HRA received i.e. INR 25/-
  • Rent Paid – 10% of salary i.e.

INR 25 – INR 5 = INR 20/-

(Please Refer Note-1)

The taxable HRA comes out to be INR 5/-

Income under the head salary = INR 80/-

Note: 1

Rent Paid also assumed to be INR 25/-.

In order to claim 100% deduction of the

HRA received,  the employee needs to pay Rent to

the extent of HRA received plus 10% of salary.

This way the whole HRA received will be exempt.

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

Other allowances             = INR 25/-

Computation of Taxable RFA

Least of the following will be taxable:

  • 15% of salary i.e. INR 11.25/-

OR

  • Hire charges i.e. INR 25/-

The taxable RFA comes out to be INR 11.25/-

Income under the head salary = INR 86.25/-

 

Let us explain the obsrevations arising from the above analysis with the help of a diagram –

total emulements of the employee in both the cases will be inr 100/-

House Rental Allowances RENT FREE accommodation
  • In this case the Income taxable under the head salary comes out to be INR 80/-.
  • In this case amount of income which will be avoided from being taxed, as compared to a case of other alternative in which it would have been taxed, will be to the extent of INR 6.25/-.
  • There will be a tax savings to the extent of INR 1.875/-.
  • In this case the Income taxable under the head salary comes out to be INR 86.25/-.
  •  In this case additional income which will be taxed, as compared to a case of other alternative in which it would have been saved, will be to the extent of INR 6.25/-.
  • In this case there will be additional tax implication to the extent of 1.875/-.

(Please note- The tax liability of the employee will be borne by the employer)

Also Read :-

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Posted Under

Category : Income Tax (25503)
Type : Articles (14970)

9 responses to “House Rent Allowance (HRA) Vs. Rent Free Accommodations”

  1. Prahlad Ray Balai says:

    Sir, I am a central government employee. I am getting HRA. I am living in a government accommodation of other department and paying there HRA as applicable according to rule. (HRA is depositing in my salary account by my department and i myself paying the HRA to other government department through cheque)
    My paying HRA to other department is income tax free or not?

  2. amit kumar says:

    I work in a government organisation.I am living with my parents in their home. I have also subscribed medical benefits meant for dependent members for them.
    can I show paying rent to my parents as they have no income at all from other sources. I am confused. please help.

  3. SHAKEEL AHAMED says:

    i am working in state government. My hra received amount is 1120 per month. But im my salary i paid 1400 per month. How is calculate?. Which HRA is taken? Whether it is paid or received?

  4. Sharad C Mishra says:

    IN case Employee alone leaving in company accommodation while his family is in another city away more then 500 KM.In this case employer not showing any HRA component while in actual employee is paying rent for his dependent. Is there any way to get some relief.What would be your suggestion.

  5. Savitha.S says:

    The total amount of HRA received is payed as Rent for the quarters given by the employer. In that case, what amount will be exempted.
    Please help me out in this issue.

  6. Aravindhan says:

    Very informative one

  7. Megha says:

    To Summarise, we can say RFA is beneficial in the following cases

    1. Actual Rent Paid is less then the HRA.

    AND

    2. Difference between rent paid and HRA is more than 15% of the Salary as defined under IT Act for RFA

    OR

    3. Difference between “Rent paid less 10% of the Basic Salary” and HRA is more than 15% of the Salary as defined under IT Act for RFA.

  8. ashutosh pande says:

    Very useful description

  9. gn c says:

    my payment is 20000/month for last year & my rent is 7500/- then there is requirement to file ITR or not.from my payment there is no deduction as tds.

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