Rent Free Allowance: What is RFA, Valuation and its Taxability?

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.

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Types of Rent-Free Accommodation

There are two types of rent-free accommodation:-

• Furnished Rent Free Accommodation
• Unfurnished Rent Free Accommodation

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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.

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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.

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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:

1. 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.

2. (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.

   (b) Such accommodation is taken on lease or rent by the employer

   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.	The value calculated will be increased by 10% p.a. of the cost of furniture if owned by the employer or the actual hire charges payable if the furniture is taken on hire. Any charges recovered from the employee shall be deducted.

3. 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.

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Difference between house rent allowance and rent-free accommodation

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.

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