House Rent Allowance (HRA) is an amount received by an employee from the employer as a part of his salary. HRA is decided by the employer on the basis of salary, city of residence etc. The house rent allowance is regulated by the provisions of Section 10 (13A) of the Income Tax Act. HRA benefits are only available to salaried individuals. Self-employed individuals are exempt from claiming HRA.
An employee can claim the deduction on his HRA under IT Act if he stays in a rented house and is in receipt of HRA from his employer. In case employee lives in his own house and does not pay any rent, he cannot claim HRA.
House Rent Allowance exempt u/s 10 (13A)
HRA received is exempt u/s 10 (13A) to the extent of the minimum of the following three points:-
1. Actual house rent allowance received from the employer
2. Excess of house rent paid minus 10% of salary
3. 50% of salary if staying in a metro city and 40% in a non-metro city.
Salary means salary includes basic salary, dearness allowance in terms of employment and commission based on fixed percentage of turnover.
Mohan has received the basic salary of Rs. 10,000.00 pm, dearness allowance of Rs. 2,000.00 pm, house rent allowance of Rs. 4,000.00 pm and paid Rs. 4,000.00 pm as rent for a house in Mumbai.
In the above scenario, we have to calculate the salary of Mohan
Salary (10,000.00×12) Rs. 120,000.00
Dearness Allowance (2,000.00×12) Rs 24.000.00
Total salary for the purpose of HRA calculation Rs 144,000.00
The minimum of the following three amounts shall be exempt from tax
1. Actual HRA received from Employer (4,000.00×12) Rs 48,000.00
2. Rent paid in excess of 10% of salary (48000 – 14400) Rs 33,600.00
3. 50% of salary Rs 72000.00
Therefore, Rs 33,600.00 shall be exempt from income tax and the balance Rs. 14,400.00 shall be included in gross salary.