HRA Calculation and Exemption Limit

How to Calculate House Rent Allowance u/s 10(13A)?

If you happen to be a salaried employee claiming House Rent Allowance (HRA) from your employer, you are eligible for an Income Tax exemption under Section 10(13A) of the Income Tax Act. How do you calculate this exemption amount? Simple.
Find the minimum of the following three options:

  1. Actual house rent allowance received from your employer
  2. Actual house rent paid by you minus 10% of your basic salary
  3. 50% of your basic salary if you live in a metro or 40% of your basic salary if you live in a non-metro

This minimum figure is the allowed income tax exemption on house rent allowance. It’s prudent to work this out so that you can structure the other components of your variable pay better.

Notes:

1. Salary for this purpose

  • Basic salary
  • Dearness Allowance if terms of employment so provides.
  • commission based on a fixed percentage of turnover.
  • Excluded: all other allowances and perquisites is to be excluded.

2. Salary related to period of rent should only be considered on due basis .
3. Salary received in period as advance or arrear not related to calculation period should not be included.
4. For calculating 40/50 % as per point 2 above place of residential accommodation is important ,not where the person is working.suppose Rajiv taken a house in Delhi on rent but has working in Rohtak than he is eligible as per point 2 up to 50 % as house is situated in Delhi.
5. The calculation should be done on separately(monthly) if salary or HRA has varies during the year.
6. No,Hra exemption if House rent paid is less than 10 % of salary.
7. Again exemption is denied where an employee lives in his own house, or in a house for which he has not paid any rent.

Examples for calculation of exemption/deduction of HRA

Example 1:

X has received following amount during the previous year.

  • Basic Salary – Rs. (6000*12) – Rs. 72,000/-
  • Dearness Allowance (D.A) – Rs. (1000*12) – Rs. 12000/-
  • House Rent Allowance (H.R.A.) – Rs. (1500*12) – Rs. 18000/-
  • Actual Rent Paid – Rs.(2000*12) – Rs. 24000/-

Calculation

The minimum of the following amount shall be exempt

  1. Actual HRA received (1500*12) – Rs. 18000/-
  2. Rent Paid in excess of 10% of salary ( 24000-8400) – Rs. 15600
  3. 40% of Salary (Basic+DA) – Rs. 33600/-

Therefore, Rs. 15600 shall be exempt and the balance Rs. 7200 shall be included in gross salary.

Example 2:

  • Rent Paid: Rs. 8000/- Pm
  • Actual HRA received Rs. 6240/- pm
  • Basic Salary: Rs. 15600/- pm
  • DA: NIL
  • Rent has commenced from 01/06/2011.
  • Basic Salary increased from Rs. 15600/- to Rs. 18600/- from 01/01/2012.

Calculation:

Exemptions will be minimum of following
In this case the computation would be as follows;
It is assumed that HRA remain unchanged.

Particulars Apr-May Jun-Dec Jan-Mar Total
Total Basic 31200 109200 55800 196200
40% of Basic 12480 43680 22320 78480
10% of Basic 3120 10920 5580 19620
HRA 12480 43680 18720 74880
Rent Paid 0 56000 24000 80000
Rent Paid in Excess of 10% 0 45080 18420 63500
HRA Exempt 0 43680 18420 62100

Frequently Asked Questions:-

Q1. How is HRA accounted for in the case of a salaried individual and a self-employed professional?

HRA (house rent allowance) is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. On the other hand, 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.

Q2. What are the dependent factors in calculating HRA for the salaried individual?

When you are calculating HRA for tax exemption, you take into consideration four aspects which includes salary, HRA received, the actual rent paid and where you reside, i.e., if it is a metro or non-metro. If these aspects remain constant through the year, then tax exemption is calculated as a whole annually, if this is subject to change, as in a rent hike, pay hike or shift in residence etc., then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.

The place of residence is significant in HRA calculation as for a metro the tax exemption for HRA is 50% of the basic salary while for non-metros it is 40% of the basic salary. This holds true especially when you work at a metro and reside at a non-metro. In this case, your city of residence only will be considered for calculating your HRA.

Q3. Can I pay rent to my parents or spouse to avail HRA benefits?

You can pay rent to your parents, however, they need to account for the same under ‘Income from other sources’ and will be entitled to pay tax for the same.

On the other hand, you cannot pay rent to your spouse. In view of the relationship when you take up residence together, you are expected to do so and hence such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny, so steer clear of these.

Q4. Do I need to submit any proof for my HRA claim?

You need to submit proof of rent paid through rent receipts, for which only two need to be submitted, one for the beginning of the year and one towards the end of the financial year. It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it etc.

Q5. Can I simultaneously avail tax benefits on my home loan and HRA?

The tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other. As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under income from other sources.

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