House Rent Allowance

Employees generally receive a House Rent Allowance (HRA) from their employers to meet the cost of a rented house taken by the employee for his stay. This allowance is generally a part of the salary package or as stated in the terms and conditions of the employment. HRA is taxable under the head Salary. Under the Income Tax Act, certain exemptions in respect of HRA is allowed under section 10(13A) and is regulated by Rule 2A.

The least of the following is exempt from Income Tax.

1.       An amount equal to 50% of the salary if the rented house is situated in Delhi, Kolkata , Mumbai or Chennai and an amount equal to 40% of Salary if the rented house is situated at any other place.

2.       The amount of House Rent Allowance received by the employer in respect of the period during which the rental accommodation is occupied the employee during the previous year,

3.       The excess amount of rent paid over 10% of the salary received by the employee during the previous year.

Note:  Salary for the purpose of calculation of exemption shall mean the Basic Salary received by the employee and includes dearness allowance if any. It also includes any commission received by the employee based on a fixed percentage of turnover achieved by the employee as stated in the terms and conditions of employment contract.

Example:Aman, who resides in Ahmadabad gets a Basic Salary of Rs 10,00,000 and HRA Rs 6,00,000. The rent paid by him is Rs. 7,00,000 . Calculate the amount of taxable House Rent Allowance for the previous year 2013-14.

Answer: The least of the following is exempt from income tax out of the HRA Rs 6,00,000 received by Aman

(a)    Rs 4,00,000 being 40% of the basic salary received by Aman .

(b)   Rs 6,00,000 being the amount of HRA received by Aman .

(c)     Rs 6,00,000 being the excess of rent paid over the basic salary received by Aman. (Rs10,00,000*10%=Rs 1,00,000. Rs  7,00,000-Rs 1,00,000=Rs 6,00,000)

Therefore the exempt amount is Rs 4,00,000.

Compiled by Raghav Sharma , a CA Final student.

 Can be approached at iamraghavsharma@gmail.com  , M. 8826822278