We would all agree that avenues of tax optimisation for salaried individuals are limited. Most of the companies widely offer accommodation benefit to its employees in the form of allowance or in kind. The existing tax provisions provide beneficial tax treatment both in case of house rent allowance (HRA) and rent-free accommodation (RFA)./Khanna and Associates
The quantum of HRA exemption under the Income Tax Rules shall be least of the following:
* HRA received
* 50% of the salary if the rented property is located in Mumbai, Delhi, Chennai or Kolkata or 40% of salary in case of other cities
* Actual rent paid less 10% of salary
Salary for the purpose of calculating HRA exemption includes basic salary, dearness allowance and commission based on fixed percentage of turnover, but excludes all other allowances and perquisites.
In order to claim HRA exemption, where rent paid during the year exceeds Rs 100,000 a year, employees are required to submit Form No. 12BB to the employer, incorporating the name, address and Permanent Account Number (PAN) of the landlord. In case the landlord does not have a PAN, a declaration to this effect from the landlord, along with the name and address of the landlord should be given to the employer. Employees are exempted from production of rent receipt to employer, if the house rent allowance is up to Rs 3,000 per month or Rs 36,000 a year./Khanna and Associates
Rent-free accommodation
Many companies also provide rent free accommodation (RFA) to some of its senior level employees. It is particularly prevalent in case of expatriates, where landlords generally prefer entering into lease agreements directly with the employer. The benefit so provided by the company is a taxable perquisite which is calculated as follows:
- a)If accommodation is owned by employer:
* 15% of salary in cities having population more than 25 lakhs;
* 10% of salary in cities having population between 10 lakhs to 25 lakhs;
* 7.5% of salary in other areas
- b)If accommodation is leased by employer, taxable value will be lower of the following:
* 15% of salary in case of residential house and 24% for hotel accommodation; and
* Actual rent payable by the employer as reduced by rent paid by the employee (if any)
Salary for the purpose of calculating RFA includes basic salary, dearness allowance, bonus, commission, all taxable allowances and any monetary payment chargeable to tax.
The above valuation rules can serve as a guide to determine the take home salary in the hands of an employee to whom either of the two benefits are extended by the company.
Salaried employees have limited avenues for tax planning; hence corporates could make use of HRA and RFA as effective tools for reducing their employees’ tax burden./Khanna and Associates.
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