How to Calculate HRA under the Income Tax Act?

ALLOWANCES [SECTION 17(3)]

The term ‘allowance' means "any amount or sum allowed regularly". Such allowances are generally given in cash along with salary by the employer. These are given to an employee to meet some specific type of expenditure of the employee or to help him to meet certain type of expenses which the employee might have incurred in the performance of duties assigned by his employer.

For example, a house rent allowance is given to help the employee to pay house rent.

House Rent Allowance

Sometimes the employer does not provide rent-free accommodation but instead helps the employee in paying rent by providing an allowance. The amount of cash paid is known as House Rent Allowance. Out of the total House Rent Allowance received, an amount equal to the minimum of the following three items is exempted from tax u/s 10(13A) read with Rule 2A and balance, if any, will be added in the salary of the employee for tax calculation. The lower of the three is exempt:

(i) 50% of salary in case of Bombay, Calcutta, Delhi and Madras, and 40% of salary in case of all other cities, or
(ii) Actual House Rent Allowance received; or
(iii)The amount by which the actual rent paid by the employee exceeds 10% of his salary.

Taxable HRA = Actual HRA received - Exempted amount

Points to be noted

(i) Meaning of Salary for this purpose:

Salary Basic + DA (Enters) / DP + Commission on turnover

In case a commission given to an employee and it is a fixed % of turnover achieved by such employee, such commission shall also be treated as part of the salary for House Rent Allowance.

(ii) Salary to be taken. For HRA exemption, salary is to be taken on due basis in suspect of the period during which rented accommodation is occupied by the employee during the previous year.

(iii) Cases when HRA is fully taxable

HRA is fully taxable in any of the following cases:

(a) If employee is living in his own house.
(b) If employee is living in a house for which he is not paying any rent.
(c) If rent paid does not exceed 10% of salary.

(iv) H.R.A fully Exempted. In case HRA is received by judges of High Court under High Court Judges (condition of service) Act 1954 and Supreme Court Judges under Supreme Court Judges (conditions of Service) Act, 1958 shall he exempted.

(v) The Exemption of HRA u/s 10 (13A) read with rule 2A shall be available even if employee is living in a rented houses at a place other than the place of his employment.

Example

Mr. Mohan is employed at Meerut on a salary of 36,000 p.m. The employer is paying H.R.A. of 9,600 p.m. but the actual rent paid by him (employee) is 14,400 p.m. He is also getting 2% Commission on turnover achieved by him and turnover is 50,00,000.

Calculate his gross salary.

Solution:

Computation of gross salary of Mr. Mohan

• Salary @36,000 p.m. - Rs. 4,32,000
• Commission @2% of turnover House Rent Allowance received - Rs.100000
• Less: Exempted u/s 10(13A) (See Note 1)- Rs, 1,15,200
• Taxable H.R.A.- Rs. 1,15,200
• __________ Nil
• _________
• Gross Salary - Rs. 5,32,000

Note 1. Exemption of H.R.A. u/s 10(13A) upto least of the following:

(i) Actual H.R.A. received = Rs. 1,15,200
(ii) Excess of rent paid over 10% of salary (1,72,800 – 53,200) =Rs. 1,19,600
(iii) 40% of salary (Meerut) = Rs. 2,12,800

Exempted H.R.A. = Rs. 1,15,200
(Least)