Two main terms that come up when discussing employee salaries and tax exemptions in India are House Rent Allowance (HRA) and Rent-Free Accommodation (RFA). While both options support employees’ housing, they differ in their form, who can use them, how taxes apply and in other respects.
This blog explains the difference between HRA and rent-free accommodation, what their tax effects are and how they both influence your salary and income tax filing.
What does House Rent Allowance (HRA) refer to?
HRA (House Rent Allowance) is a type of salary that covers the costs of living for employees in the place they rent. Part of the employee’s monthly salary, it is subject to Income Tax Act, 1961, but is allowed a partial exemption under sections 10(13A) and Rule 2A.
Salaried people living in rented houses often receive HRA. The amount of housing allowance provided depends on the location (city), the affordable rent limit and a certain amount of basic salary.
What is Rent-Free Accommodation (RFA)?
RFA stands for Rent-Free Accommodation, which is when an employer gives employees the option of using a company-offered home for free or at a reduced price. While a House Rent Allowance is a fund of fixed cash, Rent-Free Accommodation is instead a kind of flexible help given to the employee.
Rent-Free Accommodation is usually offered to executives, government officials and people who are considered for new jobs outside their current organization. Any benefit the employee gets from this perk is considered as part of their salary and taxed based on Section 17(2) of the Income Tax Act.
HRA Vs Rent-Free Accommodation: Key Differences
The following table highlights the primary differences between House Rent Allowance and Rent-Free Accommodation:
| Feature | House Rent Allowance (HRA) | Rent-Free Accommodation (RFA) |
| Nature | Cash component of salary | Non-monetary benefit (residential accommodation) |
| Tax Treatment | Partially exempt under Section 10(13A) | Fully taxable as perquisite under Section 17(2) |
| Who Pays the Rent? | The employee pays rent to the landlord | Employer provides accommodation either free or at a reduced rate |
| Eligibility for Exemption | Available if rent is paid and the employee resides in a rented house | Perquisite value calculated and taxed |
| Applicability | Mostly for private-sector salaried individuals | Mostly for government employees or senior-level corporate employees |
| Calculation Method | Based on salary, rent paid, and city of residence | Based on salary and type of accommodation |
| Exemption Limit | Least of 3 conditions under Rule 2A | Taxed as per the valuation rules notified by the Income Tax Department |
| Included in CTC? | Yes, forms part of Cost to Company (CTC) | Usually not included in CTC, considered as a perquisite |
| Requirement for Rent Receipts | Mandatory for claiming the exemption | Not applicable |
| Common in | IT sector, private firms, MNCs | PSU, government departments, banks |
Tax Exemption on HRA
House Rent Allowance can be exempted from taxation based on the rules in the Income Tax Act.
- The employee is given HRA as an addition to their monthly income.
- They cover rent costs for the place they choose to call home.
- Rent takes up more than 10% of the monthly salary.
The value of the exemption is the lowest of the following:
- Actual HRA received.
- Employees living in metro cities earn 50% of their pay, whereas those in other cities earn 40%.
- Rent paid minus 10% of salary.
As a result, people who receive a salary can lower the income tax they pay if they provide evidence of their rent and the place where they live.
Tax Implications of Rent-Free Accommodation
Unlike a House Rent Allowance, Rent-Free Accommodation is categorized as a perquisite and is taxed in the “Income from Salary” head. The decision about valuing the shares will depend on whether the employer is:
- A government organization: The license fee charged by the government is known as the perquisite value.
- A private employer: Perquisite value is set as a percentage of pay and varies according to the population of the city.
These rules are used to value perquisites given to non-government employees:
- For cities with more than 25 lakhs of people, you must pay 15% of your salary as PF.
- Among those with income of 10 to 25 lakh rupees per year, 10% should be set aside for finance purposes.
- Employees with a monthly salary of less than 10 Lakhs are required to contribute only 7.5% of their income to the Provident Fund.
If the place of residence is leased by the employer, whichever is less between the rent paid and the percentage amount given in this section will be relevant for taxation.
What is the definition of salary for HRA and RFA purposes?
Be aware that when calculating HRA and RFA, salary means:
- Basic salary
- Allowance for people with impaired hearing (if it is included in retirement benefits)
- Staff costs using a fixed charging percentage of turnover
It does not include:
- Bonuses
- Allowances other than DA
- Employer’s contribution to PF
Understanding this definition helps in the accurate calculation of exemptions and taxable perquisites.
When Should You Opt for HRA?
HRA is beneficial if:
- You reside in a place that belongs to someone else.
- HRA is part of your fixed salary as a salaried employee.
- Your aim is to take advantage of tax deductions under Section 10(13A).
It is most beneficial for workers living in cities or big towns where rent is much more expensive. You should give rent receipts and the PAN information of the landlord if the rent is more than ₹1,00,000 per year for tax benefits.
When is RFA More Common?
Employers typically provide free housing under these conditions:
- Government agencies such as IAS, IPS or defense services
- Public sector undertakings (PSUs)
- Top managers working in banks or multinational companies
- Individuals who work outside the official office or during short-term projects
RFA applies when companies need their employees to work at multiple sites and providing housing is important for the company to function properly.
Conclusion
Both benefits, House Rent Allowance and Rent-Free Accommodation, assist employees with their housing needs, even though they have different methods, tax rules and qualifications. Those paying rent can use their HRA to save on taxes, but RFA is generally seen as a useful benefit and is considered a perquisite for taxation purposes.
Deciding on HRA or RFA or knowing their effects on salary planning, is very important for managing income taxes. If you are a professional in compensation, HR or the tax field, knowing these terms can improve how you manage finances and avoid violating tax laws.
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