Taxability of House Rent Alowance

Taxability of House Rent Alowance

What is HRA (House Rent Allowance)?

House Rent Allowance is a component of the salary given by a company to its employee to meet house renting expenses. HRA is given to meet the cost of a rented house taken by the employee for his stay. It provides employees with tax benefits for what they pay towards accommodations every year, the decision of how much HRA needs to be paid to the employee is made by the employer based on certain criteria like the salary and the city of residence. In case the employee lives in his/her own house and does not pay any rent, he/she cannot claim HRA.

Why HRA?

The biggest benefit of the house rent allowance is that it provides for an avenue to reduce the taxable income, which in turn leads to a reduction in the tax that you have to pay.

How Is HRA Calculated?

There are some factors that affect it which could include things like the city in which the employee resides. If the place of residence is a metro city, then employees is entitled to an HRA equal to 50% of the salary. For all others cities, the entitlement is 40% of the salary.

Delhi, Mumbai, Kolkata and Chennai are the metro cities while all other cities are non-metro cities.

For calculating the HRA, the salary is defined as the sum of the:

Basic salary + dearness allowance

The actual HRA exemption will be the lowest of the following three:

1. The amount received as the HRA from the employer.

2. Actual rent paid less 10% of the basic salary.

3. 50% of the basic salary if staying in a metro city and 40% in a non-metro city.

An Illustrative example for calculation of exemption of HRA

Suppose Mr. Ram has received following amount during the previous year (assuming Mr. Ram lives in a non-metro city)

1. Basic Salary – Rs. (30000*12) = Rs. 360,000/-

2. Dearness Allowance (D.A) – Rs. (1000*12) = Rs. 12000/-

(Salary for calculating HRA = Basic salary + Dearness allowance i.e.360000+12000 = 372000)

House Rent Allowance (H.R.A.) – Rs. (5000*12) = Rs. 60000/-

Actual Rent Paid – Rs. (7000*12) = Rs. 84000/-

Calculation

The minimum/least of the following amount shall be exempt

  • Actual HRA received (2000*12) – Rs. 60000/-
  • Rent Paid in excess of 10% of salary (84000-37200) – Rs. 46800
  • 40% of Salary i.e 40% of 372000 = 148800

Therefore, Rs. 46800 shall be exempt and the balance Rs. 13200 shall be included in gross salary.

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