By- Sandeep Kanoi
Employees generally receive a house rent allowance (HRA) from their employers. This is part of the salary package, in accordance with the terms and conditions of employment. HRA is given to meet the cost of a rented house taken by the employee for his stay.
The Income Tax Act allows for deduction in respect of the HRA paid to employees. The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. It is to be noted that the entire HRA is not deductible. HRA is an allowance and is subject to income tax.
An employee can claim exemption on his HRA if he stays in a rented house and is in receipt of HRA from his employer. In order to claim the deduction, an employee must actually pay rent for the house which he occupies.
The rented premises must not be owned by him. In case one stays in one’s own house, nothing is deductible and the entire amount of HRA received is subject to tax. As long as the rented house is not owned by the assessee, the exemption of HRA will be available up to the minimum of the following three options:
Actual house rent allowance received from employer
Actual house rent paid by minus 10% of basic salary
50% of basic salary if you live in a metro or 40% of basic salary if living in a non-metro
The minimum of the three above is allowed as income tax exemption on house rent allowance.
Salary here means basic salary which includes dearness allowance if the terms of employment provide for it, and commission based on a fixed percentage of turnover achieved by the employee. The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.
Meaning of salary for calculation the exemption of HRA
Salary means Basic + D.A. + Commission based on fixed percentage on turnover.
Salary is to be taken on due basis in respect of the period during which the period accommodation is occupied by the employee in the previous year.
Examples for calculation of exemption/deduction of HRA
X has received following amount during the previous year.
Basic Salary: Rs 5,000×12= Rs 60,000
Dearness Allowance (DA): Rs 1000×12= Rs 12,000
House Rent Allowance (HRA): Rs 2,000×12= Rs 24,000
Actual Rent Paid: Rs 2000×12= Rs 24,000
The minimum of the following amount shall be exempt
Actual HRA received (Rs 2,000×12) = Rs 24,000
Rent paid in excess of 10% of salary (Rs 24,000- Rs 7,200) = Rs 16,800
40% of Salary = Rs 28,800
Therefore, Rs 16,800 shall be exempt and the balance Rs 7,200 shall be included in gross salary.
HRA is accounted for salaried people under Section 10 (13A). On the other hand, self-employed professionals cannot be considered for HRA exemption, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under Section 80GG, which resembles Section 10(13A) but is subject to certain conditions.
When you are calculating HRA for tax exemption, you take into consideration four aspects which includes salary, HRA received, the actual rent paid and where you reside, i.e., if it is a metro or non-metro. If these aspects remain constant through the year, then tax exemption is calculated as a whole annually, if this is subject to change, as in a rent hike, pay hike or shift in residence, etc., then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.
Extracted from Tax Guru