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

Sensys Technologies 
Updated on 27 July 2020

LinkedIn


Update:

As announced in budget 2020, taxpayers who wish to opt for the New Income Tax Regime from AY 2021-2022 can not claim the exemption of House Rent Allowance.   

House Rent Allowance (H.R.A.) results in tax savings because accounting under Income tax act is direct exemption based. However, accounting of Rent Free accommodation is valuation based taxation and added to total income of employee presumptive basis.

The principles of valuations are explained below:-

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.

Now, above factors may help a good tax planning tool for the employees and CTC planning for employer. In the following examples we shall explain this. Total outflow of the employer assumed to be Rs.  100/-

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/-

Analysis and fund planning:-

Total CTC of the employee (or outflow of employer) in both the cases will be Rs.  100/-

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.

By: Sensys Technologies

For any further information or query you can be reached to experts of our panel at contact@sensysindia.com


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