This article provides a detailed comparison of House Rent Allowance (HRA) and Rent Free Accommodation (RFA) in India, including their pros, cons, and differences.
House Rent Allowance (HRA) and Rent Free Accommodation (RFA) are ubiquitous expressions that people come across when employed in India. The former is an allowance bestowed upon employees by the company to cover their housing costs. Meanwhile, the latter is a facility given by the employer to the employee to reside in lodgings provided by the company. This write-up discusses the benefits and drawbacks of both these arrangements, their contrasts, and frequently asked questions relating to them.
Understanding HRA and RFA
HRA is an emolument furnished by the employer to defray the rental charges of an employee’s abode. HRA is a constituent of an employee’s salary and is bestowed upon them to offset their lodging expenses. The amount of HRA depends on various factors such as the employee’s salary, the city of residence, and the amount of rent paid. HRA is excused from income tax under section 10(13A) of the Income Tax Act.
Rent-Free Accommodation (RFA), on the other hand, is a facility given by the employer to the employee to live in housing provided by the company, which is complimentary. The worth of the accommodations is included in the employee’s salary, and the employee is taxed on the same.
Pros and Cons of HRA
Pros:
- HRA is a part of an employee’s salary and is tax-free up to a specific limit, enabling the employee to save money on income tax
- HRA can be expended to pay for the lease of any kind of accommodation, including a house, a flat, or a hostel
- HRA is a versatile allowance, and the sum of the HRA can be altered based on the employee’s salary and the cost of living in the city.
Cons:
- HRA is only accessible to employees who are leasing a house. Employees who own a house or inhabit a company-provided accommodation are not eligible for HRA
- The amount of HRA an employee can claim is restricted to the real rent paid minus 10% of the basic salary. This means that if an employee is paying high rent, they may be unable to claim the entire amount of HRA
- HRA does not apply to employees who work from home or have a home office.
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Pros and Cons of Rent Free Accommodation
Pros:
- Rent-Free Accommodation is a significant perk for employees who do not want to pay rent or cannot afford housing in the city where they work
- Rent-Free Accommodation can be a way for companies to attract and retain top talent, especially in cities where the cost of living is high
- Rent-Free Accommodation is a fixed benefit, and employees do not have to worry about the fluctuating cost of the rent.
Cons:
- Rent-Free Accommodation is a taxable benefit, and employees are taxed on the accommodation’s value
- Rent-Free Accommodation is inflexible, and employees cannot choose the type of accommodation or the location provided to them
- Rent-Free Accommodation may not be suitable for employees who want to live independently or have specific housing requirements.
Difference Between House Rent Allowance and Rent Free Accommodation
Employers offer HRA and RFA as benefits to help with employees’ housing costs. While RFA is a benefit offered by the employer to live in housing provided by the firm, HRA is a payment to offset the expense of renting a home. The fact that HRA is a tax-free allowance while RFA is a taxable benefit is a major distinction.
Another key distinction is the HRA’s flexibility, which lets workers choose the kind and area of housing they want. However, RFA is fixed and does not provide employees a choice in the kind or location of their accommodations. Additionally, RFA is available whether or not an employee rents, whereas HRA only applies to those who do.
An employee’s HRA claim is limited to the actual rent paid minus 10% of their basic salary. At the same time, the value of the accommodation provided by the employer is included in the employee’s salary and is taxed accordingly.
Conclusion
HRA and RFA are important benefits employers provide to employees to cover their housing expenses. While HRA is an allowance given to employees to cover the cost of renting a house, RFA is a facility provided by the employer to the employee to live in accommodation provided by the company.
Choosing between HRA and RFA depends on housing requirements, city living costs, and tax implications. Before deciding, employees should comprehend the pros and cons of both HRA and RFA. Vakilsearch can assist in understanding each option’s tax implications and benefits and drafting and reviewing rental agreements to ensure compliance with legal requirements.
FAQs
What is a rent-free accommodation allowance?
If an employer provides accommodation to the employee without charge, it is a rent-free accommodation allowance. The value of the accommodation is included in the employee's salary and taxed accordingly.
How much HRA is exempted from income tax?
The amount of HRA that is exempt from income tax is the lesser of the following: The actual HRA received The rent paid minus 10% of the basic salary 50% of the basic salary for employees living in metro cities (cities with a population of more than 10 lakhs) or 40% for employees living in non-metro cities.
How much HRA can be claimed without proof?
If the HRA amount is more than ₹ 3,000 per month, the employee must provide evidence of the rent paid, such as a rent receipt or a rental agreement, to claim the HRA.
Also,Read:
- All You Need to Know About HRA Calculators
- When Will I Receive My HRA Check?
- What is HRA and how is calculated?
