HRA (House Rent Allowance) is a payment given by an employer to an employee, so that employee can live in a rental house. Whole amount received from the employer is not fully taxable because under Section 10(13A) of Income Tax Act employees can avail exemption on HRA (House Rent Allowance).
A
major amount of it is exempted as per Section 10(13A) and the rest amount is
taxable. So in this way employees can save a huge tax.
But
remember to avail this exemption you must take care of certain rules or
conditions, which is necessary for claiming HRA exemption otherwise your HRA
exemption may be loose.
Following we have explained all in detail about HRA (House Rent Allowance) exemption rules, formula & calculation.
What is HRA?
Full form of HRA is House Rent
Allowance. HRA is a payment which is given by the employer to
employees for taking house on rent.
Generally
it happens when employees live in rented houses because sometimes postings of
employees are in those cities, where they have no own house and they take
houses on Rent.
Many
companies provide HRA which is a part of the salary of employees.
What is the taxability of House Rent Allowance (HRA)?
House Rent Allowance is
provided as a part of salary and hence it is taxable in the hand of employee
because it is an income received by employee.
But
if an employee lives in a rental house and is paying the rent then he can claim
exemption under section (13A) of the rent amount which he has paid. In this way
he can save tax.
But
if he lives in his own house, then he cannot take exemption, then in that case
the whole HRA received by him is fully taxable without any exemption.
But
in some cases it may be possible that he has his own house but after posting in
other cities he has to live in a rental house. In that case also he is eligible
for taking exemption under section 10(13A).
Also Read: Section 80C Deduction: 9 Types of TaxSaving Investments
Who is eligible for availing exemption of HRA under section 10(13A)?
Eligibility
of availing exemption under section 10(13A)
Every
employee who is receiving HRA can avail exemption but the condition should be
satisfied.
Condition
of availing exemption of HRA is that you must live in a rented house and pay
the rent. You must not have any house owned in the city in which you are
posting.
Example: Mr. A
has owned a house in Punjab but due to posting in Delhi. He lives in a rented
house in Delhi. Then he can avail exemption.
Payment
of rent is compulsory for availing exemption.
What are the
rules & formula for HRA exemption under section 10(13A)?
Exemption
of HRA is availed from the House Rent Allowance amount before computing Gross
Total Income.
Exemption
under section 10(13A) can avail on the basis of the city in which you are
living in a rented house.
Delhi,
Mumbai, Kolkata and Chennai are covered under Metro cities. So exemption
available is also different for Metro cities and other than metro cities.
|
In case of Metro Cities (Delhi, Mumbai, Kolkata
& Chennai) |
In case of other than Metro Cities |
|
Least of the following amount is exempt from
HRA:
|
Least
of the following amount is exempt from HRA:
|
Note: Exemption will be allowed for the
relevant period.
Example:
If
during FY 2020-21, Mr. A lives in a rented house for only 5 months then for the
calculation purpose of exemption salary and rent paid is taken only for the
relevant period i.e. for 5 months.
Also Read: Deduction under Section 80G and 80GGA of Income Tax Act
How to calculate HRA for exemption under section 10(13A)?
For
the calculation of HRA exemption salary means:
Basic
pay + Dearness Allowance (which form part of retirement benefits) + commission
(if based on a fixed % on turnover)
By
taking summations of all the three you will get salary for the calculation
purpose for HRA exemption.
Example:
Mr.
X is a government employee and received salary which includes:-
|
Basic Pay |
Rs.12000 p.m. |
|
Dearness allowances |
Rs.5000 p.m. |
|
HRA |
Rs.8000 p.m. |
|
Other allowances |
Rs.10000 p.m. |
|
Total salary |
Rs. 35000 p.m. |
He
lives in a rented house in Delhi and he pays 7000 rent per month. So in this
case, how to compute exemption of HRA under section 10(13A)
Solution:
Before
computing exemption we should calculate the salary for the purpose of
calculating exemption of HRA.
|
Particulars |
Amount Rs. |
|
Basic Pay (1200*12) |
144000 |
|
Dearness Allowances (5000*12) |
60000 |
|
Salary for HRA purpose |
204000 |
HRA Calculation for Exemption under section 10(13A)
Least
of the following is exempt:-
1) Actual
HRA received = 96,000 (8000*12)
2) Rent
paid by employee – 10% of salary
=
(7000 * 12) - 10% 2,04,000
=
84,000-20,400
=
63,600
3) 50%
of salary
=50%
of 2,04,000
=1,02,000
Least
of the above is 63,600. So, Rs. 63,600 is the exemption amount.
Now, calculation of Total Salary Income of Mr. X will be
|
Particulars |
Amount Rs. |
|
Basic Pay (12000*12) |
144000 |
|
Dearness allowances (5000*12) |
60000 |
|
HRA received (8000*12)= Rs.96000 Less: Exemption =
(63600) |
32400 |
|
Other allowances (10000*12) |
120000 |
|
Income under the head salary |
356400 |
Also Read:
When landlord PAN is required for claiming HRA exemption?
Generally
you can claim exemption of HRA under section 10(13A) without any requirement of
landlord PAN. But if you are paying rent in excess of Rs. 1 Lac annually then
landlord PAN is required.
You
cannot claim exemption of HRA if you are not providing PAN of your landlord in
case you are paying rent in excess of Rs.1 Lac.
What happens if the employer does not pay HRA?
Case 1: Employer does not pay HRA but you are living in
a rented house.
In
such a case you cannot claim exemption under section 10(13A). But for this a
separate deduction is available of rent paid by you even if the employer does
not provide any HRA.
For more details Read section 80GG:-
Case 2:
Employer does not pay HRA but in place of it he provides Rent Free
Accommodation (RFA):
If
the employer pays Rent Free Accommodation then it is treated as your
perquisites and taxable as a part of your salary. Rent free accommodation can
be further provided for
- Accommodation owned by the employer
- Accommodation Hired by the employer
And
out of which how much an amount becomes your perquisite depends on whether the
accommodation is furnished or unfurnished.
So,
the perquisite is taxable without any exemption.
Also Read: Section 80E – Deduction of Interest Payment on Education Loan
Summary
HRA (House Rent Allowance) is
provided by the employer to the employee as an Allowance so that employee can
live in a rented house in the place where he works. But the fulfillment of
certain rules & conditions are
necessary to avail exemption under section
10(13A).
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