House rent allowance (HRA) is given by employers to employees as part of salary. It is mentioned in the terms and conditions of employment. HRA is given to meet the cost of rented premises taken by an employee for his stay.
A person can claim exemption on his HRA under the Income Tax Act, if he stays in a rented house and is in receipt of HRA from his employer. The exemption of HRA is covered under Section 10 (13A) of the Income Tax Act and Rule 2A of the Income Tax Rules.
Two basic conditions need to be met to qualify HRA received for tax exemption. One, rent must actually be paid by the assessee for the house he occupies, and two, the rented house must not be owned by him.
The amount of HRA exempt is the least of these:
The actual amount of allowance received by an assessee in the relevant period, and during which the rented accommodation was occupied by him. The amount by which the rent paid by the assessee exceeds one-tenth of his salary.
If the house is in Mumbai, Calcutta, Delhi or Chennai, 50 percent of the salary.
If it is in any other place, 40 percent of the salary.
For the purpose of HRA and tax exemption on it, salary means basic salary and includes dearness allowance and commissions based on a fixed percentage of turnover achieved by the employee.
The deduction on HRA is not available in case an employee lives in his own house. The deduction is also not available in case the employee does not pay any rent for the house he stays in. The deduction will be available only for the period during which the rented premises is occupied by the employee and not for any period after that.
For example, during the year 2005-06, assume a person resides in Bangalore and gets a salary of Rs 4 lakhs as basic salary and Rs 2 lakhs as HRA. He pays an actual rent of Rs 1.5 lakhs.
In this case, the amount of HRA exempt would be calculated as:
You can reduce the tax liability by managing the HRA received and the rent paid carefully. Moreover, the deduction is available even if you own a house but are not living in it or have rented it out.
A person can claim exemption on his HRA under the Income Tax Act, if he stays in a rented house and is in receipt of HRA from his employer. The exemption of HRA is covered under Section 10 (13A) of the Income Tax Act and Rule 2A of the Income Tax Rules.
Two basic conditions need to be met to qualify HRA received for tax exemption. One, rent must actually be paid by the assessee for the house he occupies, and two, the rented house must not be owned by him.
The amount of HRA exempt is the least of these:
The actual amount of allowance received by an assessee in the relevant period, and during which the rented accommodation was occupied by him. The amount by which the rent paid by the assessee exceeds one-tenth of his salary.
If the house is in Mumbai, Calcutta, Delhi or Chennai, 50 percent of the salary.
If it is in any other place, 40 percent of the salary.
For the purpose of HRA and tax exemption on it, salary means basic salary and includes dearness allowance and commissions based on a fixed percentage of turnover achieved by the employee.
The deduction on HRA is not available in case an employee lives in his own house. The deduction is also not available in case the employee does not pay any rent for the house he stays in. The deduction will be available only for the period during which the rented premises is occupied by the employee and not for any period after that.
For example, during the year 2005-06, assume a person resides in Bangalore and gets a salary of Rs 4 lakhs as basic salary and Rs 2 lakhs as HRA. He pays an actual rent of Rs 1.5 lakhs.
In this case, the amount of HRA exempt would be calculated as:
- Actual HRA received: Rs 2 lakhs.
- Excess of rent paid over 10 percent of salary - Rs 1.5 lakhs less Rs 50,000 (10 percent of salary): Rs 1.10 lakhs.
- 40 percent of salary (as the accommodation is in Bangalore) - 40 percent of Rs 4 lakhs: Rs 1.60 lakhs.
- As out of these Rs 1.10 lakhs is the least, it would be allowed as a deduction from salary for the year.
You can reduce the tax liability by managing the HRA received and the rent paid carefully. Moreover, the deduction is available even if you own a house but are not living in it or have rented it out.
