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House Rent Allowance V/S Rent Free Accommodation!

Updated on: 03 Mar, 2023 03:07 PM

For the purpose of employment, people are forced to shift from one place to another and have accommodate a new house, some are provided accommodation by their employers and the rest of the employees arrange it on their own.
In the former case, there can be two possibilities. Either employer owns the house or accommodation is taken on lease by the employer. In both the cases, the house is given to the employee at concessional rent or without charge.
In the latter case, rent is paid by the employee himself. The tax implication in both the circumstances is different.
When the employer provides the accommodation, then it will be treated as perquisite (Rent free accommodation) and will be taxed in the hands of the employee at certain rates.If rent is paid by the employee directly, then he can avail benefit under House rent Allowance (HRA).
Let us discuss the tax implication in both the cases i.e. HRA and RFA

House Rent Allowance

HRA is given by the employer to the employee for meeting the cost of rented house incurred by the employee for his stay. It is a partly taxable allowance. The Income Tax allows exemption of HRA under section 10(13A). Salary for the purpose of calculation of HRA means Basic Salary + Dearness Allowance (DA) +Commission (Fixed % on sales).
As per section 10(13A), the HRA exemption is available as follows:

  • Actual House Rent received from employer
  • Actual Rent paid- 10% of the salary
  • 50% of salary (for metro cities) or 40% of salary (for non-metro cities)

The minimum of the above is allowed as Income Tax exemption for HRA.

Rent Free Accommodation

RFA means house provided by the employer to the employee for residential purpose. The tax treatment of RFA varies for government and other employees.
To know the taxability of RFA please refer the flow chart Rent Free Accommodation

The Salary for the purpose of calculation of tax on RFA shall be as under

Basic Salary + DA (if forming part of retirement benefits) + Bonus + Commission + Taxable part of AllowancesNow, after understanding the tax implication of HRA and RFA, let us understand the difference between HRA and RFA :

1. It is an allowance given by the employer to the employee for meeting the house rent expenditure. It is a perquisite whereby house is given to employee by employer for residential purpose
2. Salary for the purpose of HRA calculation includes
  • Basic Salary
  • DA (DA which forms part of Salary)
  • Commission (Fixed Percentage on Turnover)
Salary for the purpose of RFA calculation includes
  • Basic Salary
  • DA (Forming part of retirement benefits)
  • Bonus
  • Commission
  • Taxable part of allowances
3. Taxability of HRA depends upon following factors :
  • H.R.A received
  • Actual rent paid
  • Salary computed for the purpose of HRA
Taxability of RFA depends upon following factors :
  • Hire charges paid for the accommodation by the employer
  • Salary computed for the purpose of RFA

Point to remember here is that if HRA and RFA are given together in any month, and then Exemption of HRA is not available.

Point of Decision

When we compare that which benefit (RFA or HRA) should be chosen then we need to consider the rental factor very well in our calculations. In case the employer has taken the accommodation on lease then following consequences shall follow :

  1. If the rent paid is equal to HRA, then both will be beneficial and one can choose between either RFA or HRA.
  2. But, if rent paid is lesser than HRA, then HRA wins over RFA. And,
  3. If rent paid is higher than HRA, then it is beneficial to claim rent free accommodation than HRA. The reason is that the extra rent has to be borne by the employee in case of HRA, which will definitely be higher than the tax impact on the difference in both incomes.


One needs to carefully analyze both of them before selecting any one as both HRA and RFA have different tax implications. If we talk from tax perspective, then generally, HRA is preferential over accommodation perquisite. However, if we see from cash inflow perspective, then accommodation perquisite wins over HRA. So, next time you choose amongst them then keep this piece of information in mind !!

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.