Taxation of House Rent Allowance (HRA)
We often come across people who consider HRA as the amount which is given in-lieu of accommodation and hence fully exempt from tax. There are an equal number of people who consider it as fully taxable – hence, if they get, say, Rs 20,000 as HRA per month, they consider that they are effectively getting only Rs 14,000 if they are in 30% tax bracket. None of the above is actually true, as explained below.
HRA is the amount paid by the employer to an employee as a part of the salary package. HRA is given to meet the cost of rented accommodation taken by the employee for his stay. A person can claim exemption on his house rent allowance (HRA) under the Income Tax Act if he stays in a rented house. The exemption of HRA is covered under Section 10 (13A) of the Income Tax Act and Rule 2A of the Income Tax Rules.
Two conditions should be met to avail the exemption on HRA:
- The rent must actually be paid by the assessee for the rented premises which he occupies.
- The rented premises must not be owned by him.
Please do not confuse the above two conditions as ‘conditions for grant of HRA’ – it is not so. These are the conditions to be met if you wish to seek Income Tax exemption on HRA which has been granted to you by your employer.
While calculating HRA, we effectively calculate the amount that is exempt from being considered as part of the salary. This implies that complete HRA will be considered as part of the salary, except the amount as calculated below.
The amount of HRA exempt is the LEAST of these 3 conditions:
- Actual amount of HRA received by the person in the relevant period during which the rental accommodation was occupied by him.
- Amount left after deducting one-tenth (1/10th) of the person’s salary for the relevant period from the actual rent paid by him (Rent paid minus 10% of salary). [Note: No deduction if rent paid does not exceed 10% of salary]
- In case the house is in Mumbai, Calcutta, Delhi or Chennai, 50% of the salary of the person in the relevant period. In case the house is in any other place, 40% of the salary of the person in the relevant period.
Example to Calculate HRA
The deduction is available only for the period during which the rented house is occupied by the employee and not for any period after that. For example, during the year 2012-13, assume an assessee resides in Pune and gets a salary of Rs 8 lakhs as basic and Rs 3 lakhs as HRA. He pays an actual rent of Rs 2.4 lakhs.
Amount of HRA exempt would be least of the following three conditions:
- Actual HRA received = Rs 3 Lakhs
- Excess of rent paid over 10% of salary, i.e., Rs 2.4 lakhs less Rs 80,000 (which is 10% of Rs 8 lakhs salary) = Rs 1.6 lakhs.
- 40% of salary (as the accommodation is in Pune), i.e., 40% of Rs 8 lakhs = Rs 3.2 lakhs.
As, out of these, Rs 1.6 lakhs is the least, it will be allowed as a deduction from salary for the year. Thus, HRA considered as part of the salary would be 3 lakhs less 1.6 Lakhs = Rs 1.4 lakhs, which will be counted as his taxable income.
Definition of salary
For the purpose of arriving at the deduction available, salary means the basic salary and also includes the Dearness Allowance (DA), if the terms of employment provide for it, and the Commission based on a fixed percentage of turnover achieved by the employee.
When is the deduction not available
The deduction for HRA is not available in case the employee lives in his own house. The deduction is also not available in case the employee does not pay any rent for the accommodation used by him, eg, living with his parents and paying no rent to them.
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