Rent Free Allowance: What is RFA, Valuation and its Taxability?
Rent-free accommodation is a prerequisite benefit provided by companies, and it is taxable under the heading of income 'Salaries', according to the IT Act. Read more about the meaning and taxability of rent-free accommodation.
What is Rent-Free Accommodation (RFA)?
Rent- Free Accommodation (RFA) is a benefit provided by the employer in which employees are provided with residential accommodation without imposing rent or at concessional rates. Some employees get the accommodation facility from their employer without any charge, but in some cases, it is chargeable to some extent. Hence, in a simple way, RFA is a part of perquisites that are considered as additional benefits from your employer received in kind, and it is taxable as per the provisions of the Income Tax Act.
Types of Rent-Free Accommodation
There are two types of rent-free accommodation:-
- Furnished Rent Free Accommodation
- Unfurnished Rent Free Accommodation
Rent-Free Accommodation Taxability
Here's a breakdown of the taxability of different types of accommodations provided by employers:
Unfurnished Rent-free Accommodation:
- The perquisite value varies based on the city's population.
- For cities with a population above 25 lakh, 15% of the salary is considered as the perquisite.
- For cities with a population between 10 lakh and 25 lakh, the perquisite is 10% of the salary.
- For cities with a population of 10 lakh or less, the perquisite is 7.5% of the salary.
Furnished Rent-free Accommodation:
- In addition to the basic perquisite value, an extra 10% of the actual price of the furnished amenities is added.
Taxability of Hotel Accommodation:
When an employer provides hotel accommodation for 15 days or more, the perquisite value is calculated as follows:
- 24% of the salary or
- Actual charges payable to the hotel, whichever is lower.
Accommodation for Transferred Employees:
- For permanent employees transferred to a new location, accommodation provided will be considered a perquisite.
- If the stay at the new location doesn't exceed 90 days, perquisite will be calculated for only one accommodation, whichever has a lower value.
- If the stay exceeds 90 days, perquisite will be charged for both accommodations.
It's important for employees to keep track of the type of accommodation provided by their employer and understand its tax implications. Consulting with a tax expert can provide further clarity and ensure compliance with tax regulations. By staying informed about these rules, individuals can effectively manage their tax liabilities and optimize their financial planning.
Rent-Free Accommodation Calculation Example
Let's delve into Mr. Soni’s scenario to understand the calculation of the rent-free accommodation perquisite:
Employee Details:
- Name: Mr. Soni
- Employer: XYZ Company
- Posting Location: Jaipur Population approximately 16 lakh)
-
Salary Components:
- Basic Salary: Rs. 4,00,000
- Dearness Allowance: Rs. 12,000
- Commission: Rs. 6,000
Accommodation Details:
- Type: Unfurnished
- Rent: Rs. 60,000 per annum (paid by the employer)
Total Salary Calculation:
- Basic Salary + Dearness Allowance + Commission = Rs. 4,00,000 + Rs. 12,000 + Rs. 6,000 = Rs. 4,18,000
Taxable Value of Perquisite Calculation:
- Since the population of Jamshedpur falls between 10 lakh and 25 lakh, the perquisite value is calculated at 10% of Mr. Prabhat's total salary.
- Perquisite Value = 10% of Rs. 4,18,000 = Rs. 41,800
Therefore, the taxable value of the perquisite for Mr. Spni's unfurnished rent-free accommodation in Jamshedpur is Rs. 41,800.
Valuation of Rent-Free Accommodation
The value of residential accommodation provided by the employer directly or indirectly to the assessee or to any other member of his household by reason of his employment shall be determined in the following manner:
-
When accommodation is provided by the government to its employees holding office/post in connection with government affairs
In Case Accommodation is unfurnished, In case Accommodation is furnished The license Fee determined by the government is reduced by the rent actually paid by the employee The value calculated will be increased by 10% p.a. of the cost of furniture if owned by the employer or actual hire charges table in case the furniture is taken on hire. Any charges recovered from the employee shall be deducted. -
(a) When the accommodation is provided by any other employer and such accommodation is owned by the employer
In case Accommodation is unfurnished, In case Accommodation is furnished In cities having a population - - 1. Exceeding 40 lakh as per 2001 census: 10% of salary
- 2. Exceeding 15 lakh but not exceeding 40 lakh: 7.5% of salary
- 3. Not exceeding 15 lakh population: 5% of salary
The value calculated will be increased by 10% p.a.Of the cost of furniture if owned by the employer or actual hire charges payable in case the furniture is taken on hire. Any charges recovered from the employee shall be deducted. In case Accommodation is unfurnished In case Accommodation is furnished Lower of-
1. Actual rent paid by the employer; or
2. 15% of salary;
Any charges recovered from the employee shall be deducted.Value calculated will be increased by 10% p.a. of the cost of furniture if owned by the employer or Actual hire charges payable in case the furniture is taken on hire. Any charges recovered from the employee shall be deducted. -
When the accommodation is provided by the above employers in a hotel
In case Accommodation is unfurnished, In case Accommodation is furnished Not applicable Lower of-
1. The actual Charges are paid/ payable to such hotel or
2. 24% of salary
Any charges recovered from the employee shall be deducted.
The perquisites value shall be exempt if Accommodation is provided in a Hotel:-
- Such accommodation is provided for a period not exceeding 15 days, and
- It has been provided on the transfer of the employee from one place to another.
Note- Salary includes = Basic pay+ Dearness Allowance/pay( if forms part of superannuation or retirement benefits)+ Bonus + Commission + Fees+ All taxable allowances + All monetary payments chargeable to tax from one or more employers.
If you need assistance managing your taxes on various allowances, our Tax Advisory Service can be your best click; our team of experts helps you understand taxes and simplify your tax with maximum deduction so you can keep more of what you earn.
What is the Difference between RFA & HRA?
House Rent Allowance is a kind of Allowance that an employee gets from his or her employer for fulfilling the rental expenses of their house. RFA is an accommodation that covers a house or property provided by the employer for the residential purpose of the employee.
Frequently Asked Questions
Q- How much HRA is exempted from income tax?
To calculate the HRA exemption, the employee should take the lowest of these three amounts: The actual HRA amount received from the employer. 40% of the salary for a non-metro city or 50% of the salary for a metro city like Mumbai, New Delhi, Kolkata, or Chennai. Check out our Free HRA Calculator.
Q- What is tax exemption under Section 10 13A?
According to Section 10 (13A) of the Income Tax Act, a part of the HRA given by the employer is exempt from tax. The amount of exemption is the minimum of these three: The actual HRA received by the employee. Half of the employee's salary if they reside in any of the Metro cities of India.
Q- In which case HRA is exempted?
To claim HRA exemption, employees must satisfy these criteria: They do not receive any HRA from their employer. They rent a house in the city where they work and do not own any house.
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