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Everything that you should know about House Rent Allowance

House Rent Allowance also popularly referred to as HRA is a special allowance granted by employer to his employee to meet his house expenses (i.e. basically his rent expenses). It is not necessary that the employer terms it as HRA, employer may term it as any special allowance too.

(Sounds interesting? Doesn't it?) Well now if you are not sure if you get HRA or not, stop reading this article for a second and check your pay slip. It definitely forms part of your CTC. (For most people it is one of the components of CTC). Okay now that you are seen that it does form part of your CTC why don't you stop being and continue to read this to know how to take tax benefits from it.

Yes, for those who do not know Section 10(13A) of the Income Tax Act, 1961 provided tax exemption on HRA. Well, Sec. 10(13A) prescribes the conditions to be fulfilled to claim tax benefits of this HRA.

It states that, 'any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant considerations.]

[Explanation.: for the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where

(a) the residential accommodation occupied by the assessee is owned by him ; or
(b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him'

Well sounds too technical? It simply says that while calculating the amount of Total Taxable Income (that's the amount on which tax payable by everyone is calculated), a person who has component for rent in his salary by whatever name called is allowed to claim deduction of a certain amount (the amount is not prescribed but method to compute the amount that you can claim as deduction is prescribed by Rule 2A of the Income Tax Rules). However, before you jump to conclusion it also specifies few conditions that you need to fulfil to claim this exemption.

Following are the conditions that you need to fulfil before claiming exemption under this section.

  1. The Assessee should have incurred expenditure of rent for residential house (i.e. you should have actual paid rent for the house)
  2. The assessee should not be the owner of the residential accommodation occupied by him (it means you should be staying in rented house and not your own house)

The logic is simple, if you are staying in your house, you cannot act over smart and say 'Yeah, but I pay rent to myself)

Rule 2A of the Income Tax Rule states that, 'The amount which is not to be included in the total income of an assessee in respect of the special allowance referred to in clause (13A) of section 10 shall be—

(a) the actual amount of such allowance received by the assessee in respect of the relevant period; or

(b) the amount by which the expenditure actually incurred by the assessee in payment of rent in respect of residential accommodation occupied by him exceeds one-tenth of the amount of salary due to the assessee in respect of the relevant period; or

[(c) an amount equal to:

(i) where such accommodation is situate at Bombay, Calcutta, Delhi or Madras, one-half of the amount of salary due to the assessee in respect of the relevant period; and
(ii) where such accommodation is situate at any other place, two-fifth of the amount of salary due to the assessee in respect of the relevant period,]

Whichever is the least 

Well, what it simply means is that we need to calculate three amounts and the lowest of the three amounts would be allowed as deduction for tax purpose (i.e. you do not have to pay tax on this amount).

To help you understand this better consider the below illustration.

Your salary structure for per month is as under:

Particulars

Amount (in INR)

Basic Salary

15,000

Dearness Allowance (DA)

5,000

House Rent Allowance (HRA)

15,000

Conveyance

5,000

Others

25,000

Total

65,000

 

And you have taken rent of INR 10,000 in Mumbai for a house you are staying in. So the amount of HRA that would be exempt from tax would be calculated as under.

 

Particulars

Amount (in INR)

50% of Basic Salary

7,500

HRA Received  

15,000

Excess of Rent Paid over 10% of Salary (10,000 - 15,000 x 10%)

8,500

Whichever is lower

7,500

 

So the amount that would be exempt from tax is INR 7,500/- pm.

In this example, 50% of the amount that you receive as HRA is exempt from tax. HRA is one of the best yet under rated exemption used for tax planning. So consider this allowance properly and structure your CTC accordingly.

Please Note: All efforts are made to make the information true and accurate. Any error/omission is unintentional. Please contact your CA/CPA for proper planning. 


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Category Income Tax, Other Articles by - Sagar Devani 



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