House Rent Allowance V/S Rent Free Accommodation!

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

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 :

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.

Conclusion

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 !!