If you go through the break-up of your CTC statement, you will find a term HRA, which stands for House Rent Allowance. It is paid to compensate the employee for the rent he is paying in the absence of a company quarter. Is “House Rent Allowance(HRA)” a taxable income for you? The answer is ‘yes’ and ‘no’, because a portion of House Rent Allowance(HRA) is tax-free for you. How to calculate the tax-free portion of House Rent Allowance(HRA) in your salary?
House Rent Allowance (HRA) is exempted under section 10(13A) of the Income Tax Act
You will get exemption up to a minimum of the following 3 amounts:
- Actual House Rent Allowance (HRA) received by the employee in the year.
- Excess of rent paid by the employee for his accommodation in excess of 10% of his salary.
- 50% of the salary, if he stays in any of the 4 metro cities of Delhi, Mumbai, Kolkata or Chennai. Otherwise, 40% of the salary.
Salary for this calculation means the basic salary which includes dearness allowance, if the terms of employment provide for it and commission based on a fixed percentage of turnover achieved by the employee.
Please note that if the employee is staying in his own house or not paying any rent, he will not be eligible for the above tax exemption.
House Rent Allowance(HRA) – Factors Deciding Exemption
From the above rules, it is clear that there are 4 factors which decide your eligibility for House Rent Allowance(HRA) exemption. They are:
- Actual HRA received by you
- Actual Rent paid by you
- Your city of residence
- Your salary (Basic Pay & DA)
House Rent Allowance(HRA) – Sample Calculation for Exemption
Suresh is getting a Basic Pay of Rs. 50,000 per month and House Rent Allowance(HRA )of Rs. 20,000 per month. He is staying in rented premises in Chennai and is paying a monthly rent of Rs. 22,000.
Let us calculate the amount as per the 3 formula given above:
- Actual HRA received in a year = 12 x 20,000 = 2,40,000
- Rent – 10% of the salary in a year =12 x (22,000 – 10% of 50,000) =2,04,000
- 50% of the salary in a year = 50% of 12 x 50,000 = 3 Lakhs
Suresh is eligible for a deduction of Rs. 2,04,000 from his actual HRA of Rs. 2,40,000. So, he needs to pay tax for the balance of Rs. 36,000 only.
House Rent Allowance(HRA) Tax Benefits – Lose without Landlord`s Pan
The circular (08/2013) states that “…an employee claiming exemption from tax with respect to House Rent Allowance received is now required to report the PAN of the landlord to the employer, if the rent paid by the employee to the landlord exceeds Rs 1 lakh per annum, along with the rent receipt.”
It further adds that “in case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employees.”
In simple words, If the annual rent is above Rs. 1 Lakh, then the employee must report the PAN details of the landlord to the employer. If the landlord is not having a PAN, the landlord must submit a declaration to this effect along with his name and address.
The step is to plug 2 loopholes in the system
- To stop abuse of House Rent Allowance(HRA) claims.
- To furnish the correct rent income information by landlord.