Skip to main content

HRA and Income tax exemption In India

How the exemption against HRA is arrived at? and the conditions to be met to claim the exemption


   House rent allowance (HRA) is a form of allowance employees receive. HRA is exempted from tax under Section 10(13A) of the Income Tax Act. The amount of exemption is taken to be the least of amount of HRA received, excess of rent paid over 10 percent of salary, and 50 percent of salary in case the employee resides in a metro city. Otherwise, 40 percent of salary


   For the purpose of HRA, salary means basic salary plus dearness allowance and commission which is based on turnover achieved. One important condition is that you should have paid the rent for the house in which you live. Only such rent is considered for exemption. If you are staying in a house for which no rent is paid or payable, then HRA exemption is not available to you.


   Only the period for which rent has been paid is taken into account to calculate exemption, irrespective of the number of months for which rent has been paid. For purpose of deduction of tax, payment of rent by an employee drawing more than Rs 3,000 as HRA should be verified through rent receipts, though no rent receipt is required to avail the HRA perk.


   No portion of HRA will be exempt from tax if an assessee lives in his own
house or in a house for which no rent is paid by him. Also, if the actual rent paid by him is equal to or less than 10 percent of his pay.


   In other cases, exemption of HRA received is permissible to the extent admissible by applying the formulae.


   HRA is received from an employer by an employee as a part of the salary package, in terms with the terms and conditions of employment. HRA is given to meet the cost of rented premises taken by the employee for his stay.


EXEMPTION RULES

HRA exempt is the least of:

• The actual amount received by an assessee in the relevant period during which the rental accommodation was occupied by him during the previous year

• The amount by which the expenditure actually incurred by an assessee exceeds one-tenth of the salary due to the assessee in the relevant period

• In case the accommodation is situated in Mumbai, Calcutta, Delhi or Chennai, 50 percent of the salary due to the assessee in the relevant period

• In case the accommodation is situated at any other place, 40 percent of salary due to the assessee in the relevant period
As long as the rented accommodation is not owned by the assessee, the exemption of HRA will be available up to the limits specified.

HOW IT WORKS    

Assume, during the year 2010-11, a person who resides in Bangalore gets a salary of Rs 8 lakhs as basic and Rs 4 lakhs as HRA per annum. He pays an actual rent of Rs 3 lakhs per annum.


In this case, the HRA exempt would be calculated as:


   
Actual HRA received: Rs 4 lakhs
   Excess of rent paid over 10 percent of salary: Rs 2.2 lakhs (Rs 3 lakhs less Rs 80,000 which is 10 percent of salary)
   An amount equal to 40 percent of salary (as the accommodation is in Bangalore): Rs 3.2 lakhs (40 percent of Rs 8 lakhs)
   Since of these amounts Rs 2.2 lakhs is the least, it will be allowed as a deduction from salary for the year.


   NOTE: The deduction against HRA is not available in case an employee lives in his own house. The deduction is also not available in case an employee does not pay any rent for the accommodation used by him.


   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.

 

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Mutual Funds: Past Performance is not just everything

Many a times your agent / distributor / relationship manager tries to push you some mutual fund schemes by enticing you with a typical sales pitch…"Sir, this scheme has generated 20% returns in the past one year." And this sales pitch often gets louder when the market conditions have been favourable. Some of the agents / distributors / relationship managers have another unique way of luring you. They say, "Sir / madam this scheme has been awarded the best scheme award in the past by a leading business channel"... And hearing all these sales talks you investors very often get attracted and sign a cheque in favour of the respective scheme.   But please ask yourself do you hear these sales talks when the capital markets turn turbulent? Why is it so that your agent / distributor / relationship manager avoids talking to you during turbulent times of the capital markets and doesn't boast about returns generated by the respective funds or awards being conferred on t...

Dynamic Bond Funds

Invest Mutual Funds Online Download Mutual Fund Application Forms Apart from liquidity and returns, tax efficiency is another factor which should be taken into account for such investments. Today, while you're getting decent, predictable returns from bank fixed deposits, they, along with FMPs, can be ruled out as options because of the lack of interim liquidity. Hence, the only other option that you have is a dynamic bond fund. While investments in dynamic bond funds can be a compromise in terms of returns, they are extremely liquid and more tax efficient.   Some of the dynamic bond funds that you can invest in are: UTI Bond Fund, Birla Sun Life Dynamic Bond Fund Templeton India Income Fund ------------------------------------- Invest Mutual Funds Online Transact Mutual Fund Online   Download Mutual Fund Application Forms from all AMCs Download Mutual Fund Application Forms   Best Performing Mutual ...

L&T Tax Advantage

Best SIP Funds to Invest Online   The fund follows a growth approach to investing in quality stocks that have a large-cap tilt This large-cap tilted ELSS has fared consistently and fared better than its benchmark by posting a higher margin of outperformance. The fund follows a growth approach to investing in quality stocks that have a large-cap tilt, which is evident in its portfolio. The portfolio is further well diversified across market capitalisation and sectors with over 60 stocks finding a place in it. The upside with this fund is the fact that it has witnessed both down and up cycles of the market to come across as a winner in the long run. Do not doubt the fund based on its size and a few mediocre years of performance, because when analysing its rolling three year returns, the fund's performance stands out to qualify as a must have ELSS in one's portfolio. Stay invested through the lock-in and there are chances of benefiting from returns as well as tax savings will prov...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now