Taxability and Calculation of House Rent allowance (HRA)

Employees generally receive a House Rent Allowance (HRA) from their employers. This is a part of the salary package, in accordance with the terms and conditions of employment.

It is given to meet the cost of a rented house taken by the employee for his stay.

Deduction in respect of HRA paid to employees is allowed under the Income Tax Act. The exemption on HRA is covered U/s 10(13)A of the Income Tax Act.

Conditions to claim HRA

1. The employee must stay in the rented premises and must receive HRA.
2. The employee must pay rent for the house which he occupies.
3. The house must not be owned by the assessee.

HRA is available up to the minimum of the following three conditions:

• Actual House Rent Allowance (HRA) received from your employer
• Actual house rent paid by you minus 10% of your basic salary
• 50% of your basic salary if you live in a metro or 40% of your basic salary if you live in a non-metro.

Metro cities – Mumbai, Kolkata, Delhi or Chennai

Salary = Basic Salary+ Dearness Allowance (DA) + Commission based on the                fixed percentage of 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.)

HRA in case of self employed professionals:

 

Self-employed professionals cannot be considered for HRA exemption under this act, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.

Section 80GG

 If you do not receive HRA from your employer and make payments towards rent for any furnished or unfurnished accommodation occupied by you for your own residence, you can claim deduction under section 80GG towards rent that you pay.

Other points

1. HRA benefits will be available if rent is paid to your parents. But parents should pay tax on the same. The benefit will NOT be available if rent is paid your spouse.
2. Following documents must be submitted:

• Proof of rent paid through rent receipts (one for the beginning of the year and one towards the end of the financial year.)
• one rupee revenue stamp affixed with the signature of the person who has received the rent
• rented residence address
• Name of the person who rents it etc.

3.     One can avail tax benefits on home loan and HRA simultaneously.

EXTRACT OF RULE 2A OF INCOME TAX RULES I.E. HRA EXEMPTION RULES

[Limits for the purposes of section 10(13A) .

2A. The amount which is not to be included in the total income of an assessee in respect of the special allowance referred to in clause (13A) of section 10 shall be—

(a) the actual amount of such allowance received by the assessee in respect of the relevant period; or

(b) the amount by which the expenditure actually incurred by the assessee in payment of rent in respect of residential accommodation occupied by him exceeds one-tenth of the amount of salary due to the assessee in respect of the relevant period; or

(c) An amount equal to—

(i) where such accommodation is situate at Bombay, Calcutta, Delhi or Madras, one-half of the amount of salary due to the assessee in respect of the relevant period; and

(ii) Where such accommodation is situate at any other place, two-fifth of the amount of salary due to the assessee in respect of the relevant period,]

Whichever is the least.

Explanation: In this rule—

(i) “Salary” shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule;

(ii) “Relevant period” means the period during which the said accommodation was occupied by the assessee during the previous year.]