Salaried Employees Receive Tax Benefits for Rent-Free Accommodation

Many salaried employees in India receive rent-free accommodation (RFA) from their employers as a part of their remuneration package. RFA is a facility provided by the employer to the employee, where the employee does not have to pay any rent for the accommodation occupied by him or her. RFA can be in the form of a house, flat, hotel room, guest house, service apartment, etc.

RFA is a taxable perquisite in the hands of the employee, which means that the value of RFA is added to the employee’s income and taxed accordingly. However, there are some tax benefits available for salaried employees who receive RFA from their employers. Here are the details about the tax benefits for RFA that you need to know.

How is the value of RFA calculated?

The value of RFA is calculated based on the following factors:

The location of the accommodation (whether it is in a metro city or a non-metro city)
The salary of the employee (including basic salary, dearness allowance, and commission as a percentage of turnover)
The actual rent paid by the employer for the accommodation (if any)
The size of the accommodation (whether it is furnished or unfurnished)

The value of RFA is calculated as follows:

If the accommodation is owned by the employer, then the value of RFA is 15% of salary in metro cities and 10% of salary in non-metro cities.
If the accommodation is taken on rent by the employer, then the value of RFA is the actual rent paid by the employer or 15% of salary in metro cities and 10% of salary in non-metro cities, whichever is lower.
If the accommodation is furnished, then an additional 10% of the original value of furniture or actual hire charges paid by the employer, whichever is lower, is added to the value of RFA.
If more than one employee shares the accommodation, then the value of RFA is divided equally among them.

What are the tax benefits for RFA?

There are two tax benefits available for salaried employees who receive RFA from their employers:

Exemption under Section 10(13A) of the Income Tax Act
Deduction under Section 80GG of the Income Tax Act

Exemption under Section 10(13A)

Section 10(13A) of the Income Tax Act provides an exemption for salaried employees who receive RFA from their employers and also pay rent for another accommodation. This exemption is available only if the following conditions are met:

The employee receives a house rent allowance (HRA) from his or her employer
The employee lives in a rented accommodation and pays rent for it
The rented accommodation is not owned by him or her or his or her spouse or minor child or Hindu Undivided Family (HUF)
The rented accommodation is not located in the same city where he or she receives RFA

The amount of exemption under Section 10(13A) is calculated as follows:

The actual amount of HRA received by the employee
50% of salary in metro cities and 40% of salary in non-metro cities
The excess of rent paid over 10% of salary

The lowest of these three amounts is exempt from tax under Section 10(13A).

For example, suppose an employee receives a monthly salary of Rs 50,000 (including basic salary, dearness allowance, and commission), HRA of Rs 15,000, and RFA in Mumbai. He also pays a monthly rent of Rs 20,000 for another accommodation in Pune. The value of RFA is Rs 7,500 (15% of salary). The amount of exemption under Section 10(13A) is calculated as follows:

The actual amount of HRA received by the employee = Rs 15,000
50% of salary in metro cities = Rs 25,000
The excess of rent paid over 10% of salary = Rs 20,000 – Rs 5,000 = Rs 15,000

The lowest of these three amounts is Rs 15,000, which is exempt from tax under Section 10(13A).

Deduction under Section 80GG

Section 80GG of the Income Tax Act provides a deduction for salaried employees who receive RFA from their employers and do not receive any HRA from them. This deduction is available only if the following conditions are met:

The employee lives in a rented accommodation and pays rent for it
The rented accommodation is not owned by him or her or his or her spouse or minor child or Hindu Undivided Family (HUF)
The employee does not own any other residential property at any place where he or she performs his or her duties or at any other place where he or she resides
The employee files a declaration in Form 10BA stating the details of the rent paid and the accommodation occupied by him or her

The amount of deduction under Section 80GG is calculated as follows:

Rs 5,000 per month
25% of the total income (excluding long-term capital gains, short-term capital gains under Section 111A, and income under Section 115A or 115D)
The excess of rent paid over 10% of the total income

The lowest of these three amounts is deductible under Section 80GG.

For example, suppose an employee receives a monthly salary of Rs 50,000 (including basic salary, dearness allowance, and commission) and RFA in Delhi. He also pays a monthly rent of Rs 15,000 for another accommodation in Noida. The value of RFA is Rs 5,000 (10% of salary). The amount of deduction under Section 80GG is calculated as follows:

Rs 5,000 per month = Rs 60,000 per year
25% of the total income = Rs 1,50,000 per year
The excess of rent paid over 10% of the total income = Rs 1,80,000 – Rs 60,000 = Rs 1,20,000 per year

The lowest of these three amounts is Rs 60,000, which is deductible under Section 80GG.

RFA is a taxable perquisite for salaried employees who receive it from their employers. However, there are some tax benefits available for them if they also pay rent for another accommodation. They can claim exemption under Section 10(13A) if they receive HRA from their employers or deduction under Section 80GG if they do not receive HRA from their employers. These tax benefits can help them reduce their tax liability and save money.