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

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

Components of salary:

• Basis Salary.

• Dearness Allowance (Only the DA which forms part of the salary).

• Percentage bases commission.

Extent of taxation:-

Exemption based:- HRA is taxable if received more than least of the following:

• H.R.A received

• 50% of salary

• Rent Paid – 10% of salary

Examples:-

If the rent paid is zero, exemption will be zero and whole HRA received will become taxable.

Conclusion:-

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.

Components of salary:

• 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)

Extent of taxation:-

No separate exemption under this,

Least of the following is taxable

(In case accommodation is hired by the employer) :

• Hire charges OR

• 15% of Salary

Conclusion:-

Taxability under this is dependent upon the following factors:

• Hire charges paid for the accommodation by the employer.

• Salary computed for this purpose.

House Rental Allowances

RENT FREE accommodation

• Basis salary= Rs.  50/-

• HRA= Rs. 25/-

• Other allowances = Rs. 25/-

Computation of Taxable HRA

HRA received = Rs. 25/-

Deduction will be least of the following:

• 50% of salary i.e. Rs. 25/-

• HRA received i.e. Rs. 25/-

• Rent Paid – 10% of salary i.e.

Rs. 25 – Rs. 5 = Rs. 20/-

The taxable HRA comes out to be Rs. 5/-

Income under the head salary = Rs. 80/-

• Basis salary= Rs. 50/-

• RFA(Hire charges paid) = Rs. 25/-

• Other allowances  = Rs. 25/-

Computation of Taxable RFA

No tangible receipts to employee.

Least of the following will be taxable:

• 15% of salary i.e. Rs. 11.25/-OR

• Hire charges i.e. Rs. 25/-

The taxable RFA comes out to be Rs. 11.25/-

Income under the head salary = Rs. 86.25/-

House Rental Allowances

RENT FREE accommodation

• Income taxable under the head salary : Rs. 80/-.

• Extra income that can be avoided from being taxed: Rs. 6.25/-.

• So it’s a tax advantageous.

• Income taxable under the head salary : Rs. 86.25/-.

• Extra income that is taxed: Rs. 6.25/-.

So the taxes disadvantage.