House Rent Allowance (HRA) is given by the employer to the employee to meet the expenses in connection with rent of the accommodation which the employee might have to take for his residential purpose. This House Rent Allowance so paid by the employer to his employee is taxable under head “Income from Salaries” to the extent it is not exempt u/s 10(13A).
Exemption in respect of House rent allowance is regulated by rule 2a, it is based upon the following:
- An amount equal to 50% of Salary, where residential house is situated at Bombay, Calcutta, Delhi or Madras and an amount equal to 40% of Salary where residential house is situated at any other place.
- House rent allowance received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year
- The excess of rent paid over 10% of Salary
Amount exempt from Tax: The least of the above three is exempt from Tax
How to Calculate HRA
To understand how to calculate HRA, let us take an example. Mr X stays in Mumbai and pays a rent of Rs. 10,000 per month.
For calculating HRA that is exempt from income tax we have:
Salary - Rs. 30,000 per month (the basic salary will be considered in this case since there is no commission or dearness allowance) HRA provided by company – Rs. 13,000 per month 10% of basic salary (10% of annual basic salary) – Rs. 36,000
Now we calculate the three scenarios:
- Amount received as HRA from employer = Rs. 13,000 X 12(months) = Rs. 1,56,000
- Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
- 50% of basic salary since he lives in a metro = Rs. 1,80,000
In the above case, it is evident that the HRA amount which will be exempt from tax will be Rs. 84,000 because that is the amount that is the least of the three scenarios.
Benefits of HRA
The biggest benefit of the house rent allowance is that it provides for an avenue to reduce the taxable income , which in turn leads to a reduction in the tax that you have to pay.
The following other points should be kept in view:
What is Salary? – “Salary” for this purpose means basic salary and includes dearness allowance if terms of employment so provide. It also includes commission based on fixed percentage of turnover achieved by an employee as per terms of contract of employment – Bur it does not include any other allowance and perquisite.
“Salary” shall be determined on “due” basis – Basic salary, dearness allowance and commission are determined on due basis in respect of the period during which rental accommodation is occupied by the employee in the previous year. It is therefore, follows that salary of period, other than the previous year is not considered even though such amount is received during the previous year and is taxable on “receipt” basis. Likewise, salary of the period during which rented accommodation is not occupied in the previous year, is left out of the aforesaid computations.
When exemption is not available - Exemption is denied where an employee lives in his own hose, or in a house for which he does not pay any rent or pays rent which does not exceed 10 percent of salary.
Mode of computation of exemption – The amount of exemption in respect of House rent allowance received by an employee depends upon the following-
- “Salary” of the employee,
- House rent allowance
- Rent paid and
- The place where house is taken on rent
When these four are same throughout the previous year, the exemption should be calculated on “annual” basis. When, however, there is a change in respect of any of the aforesaid factors, then the exemption shall be worked out on “Monthly” basis.