House Rent Allowance (HRA) allowance is received by the salaried class employees. HRA allowance is allowed as per the section 10(13A) of Income tax act in accordance with the Rule 2A of the Income Tax Rules.
Under Section 10(13A) of the Income-tax Act, 1961, any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee is exempt from Income-tax to the extent as may be prescribed, having regard to the area or place in which such accommodation is situated and other relevant considerations.
As per the Indian income tax law, the HRA exemption should be calculated as the least of the following.
1. Rent paid in excess of 10% of basic salary.
2. Actual HRA received by the employee.
3. 40% of basic salary, if the location of the residence is in a non-metro city/town or 50% of basic salary, if the location of the residence is in a metro city i.e. Mumbai, Kolkata, Delhi or Chennai.
“Salary” for this purpose means basic salary and includes dearness allowance if the terms of employment so provide. It also includes commission based on fixed percentage of turnover achieved by an employee as per the terms of contract of employment. But it does not include any other allowance or perquisite.
The “salary” for this purpose shall be determined on “due” basis i.e. Basic salary, dearness allowance and commission are determined on “due” basis in respect of the period during which rental accommodation is occupied by the employee in the previous year.
The amount of exemption in respect of house rent allowance received by an employee depends upon the following –
a) “Salary of the employee”
b) House rent allowance received
c) Rent paid
d) The place where the house is taken on rent.
In case all of the four remain the same throughout the year, the HRA tax exemption calculation is to be done on ‘annual’ basis. On the other hand, if there is a change in any of the variable during the year then HRA tax exemption calculation is to be done on monthly basis.
Exemption is denied where an employee lives in his own house, or in a house for which he does not pay any rent or pays rent which does not exceed 10 per cent of salary.
Examples for calculation of exemption/deduction of HRA
X has received following amount during the previous year.
- Basic Salary – Rs. (5000*12) – Rs. 60,000/-
- Dearness Allowance (D.A) – Rs. (1000*12) – Rs. 12000/-
- House Rent Allowance (H.R.A.) – Rs. (2000*12) – Rs. 24000/-
- Actual Rent Paid – Rs. (2000*12) – Rs. 24000/-
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.