For most employees, House Rent Allowance (HRA) is a component of their salary structure. Although it is a part of your salary, HRA, unlike basic salary, is not fully taxable. Subject to certain conditions, a part of HRA is exempted under Section 10 (13A) of the Income-tax Act, 1961.
The amount of HRA exemption is deductible from the total income before arriving at a taxable income. This helps the employee to save tax.HRA received from your employer, is fully taxable if an employee is living in his own house or if he does not pay any rent.
Who can avail HRA? The tax benefit is available only to a salaried individual who has the HRA component as part of his salary structure and is staying in a rented accommodation. Self-employed professionals cannot avail the deduction.
How much is exempted?
The exemption for HRA benefit is the minimum of: i) Actual HRA received
ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and
iii) Excess of rent paid annually over 10% of annual salary
For calculation purpose, the salary considered is ‘basic salary’. In case ‘Dearness Allowance (DA)’ (if it forms a part of retirement benefits) and ‘commission received on the basis of sales turnover’ is applicable, they too are added to compute the minimum HRA exemption available.
The tax benefit is available to the person only for the period in which the rented house is occupied.
Example of HRA calculation
Let’s say an individual, with a monthly basic salary of Rs 15,000, receives HRA of Rs 7,000 and pays Rs 8,400 rent for an accommodation in a metro city. The tax rate applicable to the individual is 20 percent of his income.
To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:
i) Actual HRA received = Rs 84,000
ii) 50% of salary (metro city) = Rs 90,000 (50% of Rs 1,80,000)
iii) Excess of rent paid annually over 10% of annual salary = Rs 82,800 (Rs 1,00,800 – (10% of Rs 1,80,000))
It shows that of Rs 84,000 actually received as HRA, Rs 82,800 gets tax exemption and only the balance of Rs 1,200 gets added to the employee’s income, on which a tax of Rs 240 ( 20 per cent slab ) gets payable.
HRA exemptions can be availed only on submission of rent receipts or the rent agreement with the house owner.
It is mandatory for the employee to report the Pan Card of the ‘landlord’ to the employer if the rent paid is more than Rs 1,00,000
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