House Rent Allowance (HRA) Exemption Calculation

House Rent Allowance (HRA) Exemption Calculation

House Rent Allowance (HRA) Exemption Calculation

What is HRA?

House Rent Allowance basically means the compensation received along with Salary, by an employee from his employer towards Rent paid by the employee for his accommodation. When the salary received by an employee in excess of the basic exemption limit is taxable as per The Income Tax Act, The same provides exemption under section 10 (13A) for the House Rent Allowance received by the employee.

Section 10(13A):

 “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 assesse, to such extent as may be prescribed having regard to the area or place in which such accommodation is situated and other relevant considerations.”

While Rule 2A provides us with the consideration for the calculation of exemption that can be availed for HRA:

HRA Exemption Calculation:

HRA exemption is granted with amount derived from Least of the following three amounts:

1.       House Rent Allowance actually received by the employee

2.       Actual rent paid less 10% of Basic Salary

3.       50% of the Basic Salary in case the accommodation is in Metro else 40% of the Basic Salary if the accommodation is in a non metro

Examples of the HRA Exemption Calculation

Important Points to be kept in mind for availing the exemption of HRA:

Ø  HRA is received by the salaried employee only so it is available as an exemption for salaried employee only and not to the self employed people.

Ø  The employee must have actually paid the rent for the accommodation i.e. he must not be residing at his own house or at any other place where he is not supposed to pay any consideration. Cross Check for this purpose is there as assessee has to provide the receipt for Rent paid with the details such as name of the landlord, tenant, Address of the accommodation, Amount of Rent paid, etc.

Ø  If the employee resides at a rented accommodation for a part of the financial year than the HRA can be claimed on proportionate basis. (We will understand the same more clearly with the help of an example at the end.)

Ø  The basic Salary to be considered for the purpose of calculating HRA includes Basic pay, dearness allowance, if provided in terms of employment and commission as per fixed percentage of turnover (if received). (All other perquisites and allowances are excluded).

Ø  When the assessee is working in a metro and residing in a non-metro, and the rent is paid for such accommodation than, 40% of the basic salary is to be considered when calculating HRA as per least of 3 rule. Because the place of accommodation is an important factor.

Examples of the HRA Exemption Calculation