House Rent Allowance or Rent Free Accommodation – Claim Deduction

Salaried Individuals working in outstation jobs have to either reside in a rented / owned house or are being provided with accommodation at their owner’s cost. An interesting fact to be noted here is that in both the scenarios, employees can reduce their tax liability by claiming deduction for the same either as House Rent Allowance (HRA) or as Rent Free Accommodation (RFA).

Scenario 1 – House Rent Allowance (HRA)

House Rent Allowance (HRA) is monetary perquisite provided by the employer for meeting cost of accommodation to the employee.

HRA is exempt to the extent of least of the following:

  • Actual HRA received by the employee.
  • Rent paid for accommodation less 10% of Salary for the relevant period.
  • 50% of Salary if situated at Mumbai, Chennai, Kolkata, &Delhiand 40% if situated at any other place.

The exemption is granted only if the employee has paid rent for his accommodation. Entire amount of HRA received will be taxable if the employee resides in his own house or he owns any house in the same city or place.

Scenario 2 – Rent Free Accommodation (RFA)

RFA is a non monetary deductible perquisite and the employee can get its deduction in the following situations:

  • If the accommodation is owned by the employer:

If the population of city where accommodation is provided exceeds 25 lakh – 15% of Salary

If the population of city where accommodation is provided exceeds 10lakh but not 25lakh – 10% of Salary

Any other case – 7.5 % of Salary

  • If the accommodation is taken on lease or rent by the employer – 15% of Salary

In case rent – free furnished accommodation is provided, then the amount of perquisite computed above will be increased by either 10% of the original cost of furniture (if owned by the employer) or actual hire charges payable or paid (if hired by the employer).

  • If accommodation is provided in a hotel, then perquisite will be valued @ 24% of salary.
  • If accommodation is provided at concessional rate, then the amount thus calculated will be reduced by the rent paid by the employee.

“Salary” for the purpose of calculation of HRA includes Dearness allowances (if the terms of employment so provides). For the purpose of calculation of RFA, in addition to Dearness allowances (if the terms of employment so provides), bonus, commission, fees, all other taxable allowances and any other monetary payment should be included in salary. provides full fledged comprehensive tax planning service wherein we suggest the best investment and tax saving plans, which would minimize your total tax on income.

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