HRA vs Rent Free Accommodation perquisite – Structure your Compensation correctly!

All you need to know when you are staying in an accommodation provided by your employer

 

 (All articles by CA Prince Doshi

Tax Planning services by Prince Doshi)

Presently, individuals are forced to relocate from one city to another for employment and have to look out for an accommodation in the city where employed.  Generally, the employees either find an accommodation on their own or stay in the accommodation provided by the employer.  In the former, rent is paid by the employee himself whereas in the latter, rent is either paid by the employer (if the accommodation is leased by employer) or provides an accommodation without any rent or at concessional rent (if owned by employer). The tax liability of an employee will be different in both the scenarios.

The purpose of this article is to highlight the income-tax implications for the employee under both the scenarios.  Paying rent directly will enable the employee to claim benefit under House Rent Allowance (‘HRA’) (refer to my previous article for detailed explanation – http://insideiim.com/know-everything-about-tax-saving-from-the-house-rent-allowance-component-of-your-ctc/).  In the latter case, the employee will be considered to be in receipt of perquisites in the nature of rent free accommodation or concessional rent accommodation. 

‘Perquisite’ is a non-monetary gain incidentally made from employment in addition to regular salary and / or wages and accordingly taxed as salary income.  In case of rent free / concessional rent accommodation provided by the employer, a certain proportion of the salary (based on a formula) will be deemed to be perquisite value for employee and shall be taxed in the hands of the employee.

The computation mechanism of the perquisite value of rent free / concessional rent accommodation provided by the employer shall be as under:

 A.  In case the accommodation is owned by the employer and is provided rent free / at concessional rent to employee (Option 1):

  1. 15% of salary (in cities having population exceeding 25 lacs as per 2001 census)*
  2. Add: Furnishing charges, if any (10% p.a. on original cost or actual hire charges) – if a furnished accommodation is provided
  3. Less: Rent recovered, if any, by the employer from the employee

*10% of salary (in cities having population less than 25 lacs but greater than 10 lacs) or 7.5% of salary (in any other place)

 

B.   In case the accommodation is taken on lease or rent by the employer and is provided rent free / at concessional rent to employee (Option 2):

  1. Actual amount of rent payable by employer or 15% of salary, whichever is lower
  2. Add: Furnishing charges, if any (10% p.a. on original cost or actual hire charges) – if a furnished accommodation is provided
  3. Less: Rent recovered, if any by the employer from the employee

Salary, for the purpose of calculating the said perquisite value includes all taxable monetary payments received by the employee from the employer during the period of accommodation provided. 

 

Let’s take an illustrative example where your basic salary is Rs 450,000 p.a., total allowances Rs 55,000 (of which Rs 40,000 are exempted allowances), and taxable perquisites (excluding that of rent free accommodation) Rs 20,000.  The employer has provided you with a rent free accommodation in a metro say Mumbai for the entire FY 2012-13.  Along with the accommodation, furniture costing Rs 200,000 is also provided.  In this case, the perquisite value for rent free furnished accommodation will be calculated as under:

Salary amount that will be considered for calculating the perquisite value will be:

Basic salary – Rs 450,000

Taxable allowances – Rs 15,000 [Rs 55,000 – Rs 40,000 (exempted allowances)]

Taxable perquisites – Nil [to be ignored for calculating this perquisite value]

Total – Rs 465,000

 

Particulars

Accommodation is owned by the employer

Accommodation is taken on rent by the employer**

15% of salary / Lease rent 69,750 60,000**
Add: Furnishing costs @ 10% 20,000 20,000
Less: Rent recovered NIL NIL
Total perquisite value 89,750 80,000

**Accommodation is taken on rent by the employer @ Rs 5,000 p.m.  Therefore lower of Rs 60,000 or Rs 69,750 (15% of salary) shall be considered for calculating perquisite value

 

Your total taxable salary income will be:

 

Particulars

Accommodation is owned by the employer

Accommodation is taken on rent by the employer

Basic Salary 450,000 450,000
Add: Taxable allowances 15,000 15,000
Add: Taxable perquisites 20,000 20,000
Add: Taxable perquisites in the nature of rent free furnished accommodation 89,750 80,000
Total Taxable Salary income 574,750 565,000

 

It can be seen from the above that although you would be in receipt of total salary amounting to only Rs 525,000 [Rs 450,000 + Rs 55,000 + Rs 20,000] (assuming no TDS and other deductions) of which Rs 485,000 will be taxable, your total salary for income-tax purposes would be Rs 614,750 or Rs 605,000 [Rs 525,000 + Rs 89,750 / Rs 80,000] – of which taxable component will be Rs 574,750 / Rs 565,000 as shown above. It implies that taxes on additional income (rent free accommodation perquisite) will have to be paid by you out of your own pocket without any cash inflow as salary from employer.

 

(Tax Planning services by Prince Doshi)

HRA Vs Rent free accommodation perquisite – From a tax perspective, it is preferential to opt for HRA rather than accommodation perquisite. However, from a cash inflow perspective it is always preferential to opt for accommodation perquisite rather than HRA.  Higher tax will be required to be paid in case of accommodation perquisite since in case of HRA, HRA received can be tax exempt but accommodation perquisite will be entirely subject to tax even without receiving the salary amount in cash. This approach however, may not suit the employees who are earning huge salaries since the burden of tax will wipe off the benefit of non rental payments. Therefore, one needs to carefully analyze the two situations before selecting any option.

 

Check this out – Your salary is Rs 500,000 p.a. with details:  Basic Salary – 250,000, Conveyance – 9,600, HRA – 125,000, special allowance – 115,400 and tax saving investments of Rs 100,000.  Scenario 1 – Rent amount of Rs 12,500 p.m. is paid by you. Scenario 2 – Rent free accommodation is provided to you by your employer. Your total tax liability & cash inflows under the above scenarios will be:

 

Particulars

Scenario 1 – rent paid

Scenario 2 – rent free acc.

Non-taxable

Taxable

Non-taxable

Taxable

Basic Salary 250,000 250,000
Transportation allowance 9,600 9,600
House rent allowance 125,000 125,000
Special allowance 115,400 115,400
Rent free accommodation perquisite 73,560
Gross Taxable Income   365,400   563,960
Tax –savings investment deductions (100,000) (100,000)
Net Taxable income 265,400 463,960
Tax liability   6,740   27,190
Cash inflow from salary   500,000   500,000
Cash outflow – investments (100,000) (100,000)
Cash outflow – rent payments (125,000)
Cash outflow – tax payment (6,740) (27,190)
Net Cash inflow 268,260 372,810

 

Hope the above helps everyone to draft their compensation plan efficiently.

– Prince Doshi

(Prince Doshi  is a qualified Chartered Accountant and a B.Com graduate from Narsee Monjee College of Commerce and Economics.  He has post qualification experience working as an Associate for BMR & Associates, a leading tax consultancy firm.  Presently, he has his own Chartered Accountancy practice specializing in the field of income tax consultancy, sales tax, service tax and audit compliance.)

All articles by CA Prince Doshi

Tax Planning services by Prince Doshi

 

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