Income tax and HRA

by: rupeetalk



House Rent Allowance (HRA) is an allowance given by an employer to an employee. The sole purpose of which is to meet the cost of renting a home. Here, we hope to clear the concepts of HRA and how the income tax exemption on HRA is calculated.

You can claim HRA if you fulfil the following three conditions:

1. HRA allowance should be a part of your salary package.

2. You are staying in a rented accommodation and paying rent for it.

3. The rent exceeds 10 per cent of your salary (basic + DA).

Tax treatment of HRA is a bit complicated and there are three figures that need to be computed:

* Actual HRA received
* Amount by which rent paid exceeds 1/10th of salary (basic + DA)
* 50% of the salary (basic + DA) if located in Metros like Mumbai, Delhi, Kolkata or Chennai and 40% of salary if located elsewhere.

The lowest of the above three amounts is allowed as a deduction from the HRA received and the rest is considered taxable. Let’s try and understand this through the following example:

Ram lived in Mumbai and paid a rent of Rs 10,000 p.m. His basic salary was Rs 25,000 and daily allowance Rs 3,000 p.m. He received an HRA from his employer of Rs 8,000 p.m. The 3 figures that need to compute his HRA tax liability are:

1. Actual HRA received = Rs 8,000

2. Amount by which rent paid exceeds 1/10th of salary = Rs 10,000 – (10% of Rs 25,000+ Rs 3,000) = Rs 7,200

3. 50% of his salary (Rs 25,000 + Rs 3,000) = Rs 14,000

The lowest among the 3 figures (Rs 7,200) will be allowed as a deduction and the rest (Rs. 800) will be taxable.