Exemption of House Rent Allowance in case of Rented House for Income Tax Purpose

Friends,

If you are a salaried person getting House Rent Allowance and residing in a Rented Accommodation then there is a provision in the Income Tax Act for a exemption/Deduction of House Rent Allowance.

Allowance is a fixed monetary amount paid by the employer to the employee, Whether personal or for the performance of his duties. These allowances generally taxable unless a specific deduction/exemption is provided by law. So in this article we will discuss about House Rent Allowance broadly. So you can understand and calculate it very easily. Please read complete article including the notes given at the end of the article.

House Rent Allowance (HRA) is give by the employer to the employee to meet the expenses in connection with rent of the accommodation.  HRA is exempt under section 10(13A) to the extent of the minimum of the following three amounts :

• 1. Actual House Rent Allowance received by the employee
  2. Excees of rent paid for the accommodation occupied by him over 10 % of the salary.
  3. 50% of salary where the residential house is situated at Mumbai, Calcutta, Delhi or Chennai and 40% of the salary where the house is situated at any other place.

The minimum of the above three amounts shall be exempt from tax and the balance shall be taxable and thus included in gross salary of employee.

Meaning of Salary for calculation the exemption of HRA

• Salary means (Basic + D.A + Commission based on fixed percentage on 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.

Calculation Monthly or Yearly?

The exemption in respect of HRA is based upon the following factors:

1. Salary
2. HRA received
3. Place of Residence,
4. Rent Paid,

HRA exemption should not be calculated on yearly basis, if there was any change in above factors during previous year.

Examples for calculation of exemption/deduction of HRA

X has received following amount during the previous year.

1. Basic Salary – Rs. (5000*12) – Rs. 60,000/-
2. Dearness Allowance (D.A) – Rs. (1000*12) – Rs. 12000/-
3. House Rent Allowance (H.R.A.) – Rs. (2000*12) – Rs. 24000/-
4. Actual Rent Paid – Rs.(2000*12) – Rs. 24000/-

Calculation

The minimum of the following amount shall be exempt

• Actual HRA received (2000*12) – Rs. 24000/-
• Rent Paid in excess of 10% of salary ( 24000-7200) – Rs. 16800
• 40% of Salary – Rs. 28800/-

Therefore, Rs. 16800 shall be exempt and the balance Rs. 7200 shall be included in gross salary.