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.
