House Rent Allowance (HRA) Vs. Rent Free Accommodations (RFA) ~ Roysahab My Digital Diary

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

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If you are getting House Rent Allowances ( H. R. A.) then there will tax savings. It is mainly because of the method of Income Tax Acts & Rules employs for valuation of tax-ability of House Rent Allowances ( H. R. A.) and Rent Free Accommodation ( R. F. A.).

The main components / differences between House Rent Allowances ( H. R. A.) and Rent Free Accommodations ( R. F. A. ) are explained here with the help of 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.

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).

There is no separate exemption under this, least of the following is taxable (In case accommodation is hired by the employer) :

Hire charges

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 10000/-

House Rental Allowances

RENT FREE accommodation

Basis salary = INR 5000/-

HRA = INR 2500/-

Other allowances = INR 2500/-

Computation of Taxable HRA

HRA received = INR 2500/-

Deduction will be least of the following:

50% of salary i.e. INR 2500/-
HRA received i.e. INR 2500/-
Rent Paid – 10% of salary i.e.

INR 2500 – INR 500 = INR 2000/-

(Please Refer Note-1)

The taxable HRA comes out to be INR 500/-

Income under the head salary = INR 8000/-

Note: 1

Rent Paid also assumed to be INR 2500/-.

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 5000/-

RFA(Hire charges paid) = INR 2500/-

Other allowances = INR 2500/-

Computation of Taxable RFA

Least of the following will be taxable:

15% of salary i.e. INR 1125/-

Hire charges i.e. INR 2500/-

The taxable RFA comes out to be INR 1125/-

Income under the head salary = INR 8625/-

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

Total emoluments of the employee in both the cases will be INR 10000/-

House Rental Allowances	RENT FREE accommodation
In this case the Income taxable under the head salary comes out to be INR 8000/-. 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 625/-. There will be a tax savings to the extent of INR 187.5/-.	In this case the Income taxable under the head salary comes out to be INR 8625/-. 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 625/-. In this case there will be additional tax implication to the extent of 187.5/-.

Hope the above will help to differentiate & understand about HRA & RFA.

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

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This post was written by: Pradip Roy

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