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House Rent Allowance Section 10(13A)

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The article deals with the House Rent Allowance. The article  explains the how House Rent Allowance is calculated from Salaries. Exemption in  respect of House Rent Allowance is regulated by rule 2A. HRA or the House Rent Allowance is an amount paid by employers to employees as a part of their salaries. 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. The house rent allowance is regulated by the provisions of Section 10(13A) of the IT Act.

House Rent Allowance Section 10(13A)

House rent allowance benefits are only available to salaried individuals. Self-employed individuals are exempt from claiming HRA. This exemption is also available only if the employee is living in rented accommodations. In case the employee lives in his/her own house and does not pay any rent, he/she cannot claim HRA.

In case the employee is living in a rented accommodation and the rent paid exceeds Rs.1 lakh in one financial year then the PAN details of the landlord need to be submitted along with the HRA claims.

How is House Rent Allowance Decided

House Rent Allowance Section 10(13A)

 

HRA is actually decided based on the salary. There are some other 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 are entitled to an HRA equal to 50% of the salary. For all others cities the entitlement is 40% of the salary.

For the purpose of calculating the HRA, the salary is defined as the sum of the basic salary , dearness allowances and any other commissions. If the employee is not receiving a dearness allowance or commissions then the HRA will be 50%/40% of the basic salary.

The actual HRA offered will be the lowest of the following three provisions:

  • The amount received as the HRA from the employer.
  • Actual rent paid less 10% of the basic salary.
  • 50% of the basic salary if staying in a metro city and 40% in a non-metro city.

House Rent Allowance Section 10(13A)

Calculation of House Rent Allowance

To understand how to calculate HRA let us return to the example of Manohar. He stays in Mumbai and pays a rent of Rs. 10,000 per month. His payslip is shown below.

Example Payslip:

Employee No – 1123 Name – Manohar    
Joining Date – 21/12/2015 PF No – SB/AYE/1234567/123/1234567    
       
BASIC 30,000 PF 2,000
HRA 13,000 PROFESSIONAL TAX 200
CONVEYANCE 2,000    
SPECIAL ALLOWANCE 3,000    
MEDICAL 1,250    
LTA 5,000    
Total Earnings 54,250    

For calculating Manohar HRA that is exempt from income tax we have:

Salary – Rs. 30,000 per month (the basic salary will be considered in this case since there is no commission or dearness allowance) HRA provided by company – Rs. 13,000 per month 10% of basic salary (10% of annual basic salary) – Rs. 36,000

Now we calculate the three scenarios:

  • Amount received as HRA from employer = Rs. 13,000 X 12(months) = Rs. 1,56,000
  • Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
  • 50% of basic salary since he lives in a metro = Rs. 1,80,000

In the case of Manohar it is evident that the HRA amount which will be exempt from tax will be Rs. 84,000 because that is the amount that is the least of the three scenarios.

Benefits of House Rent Allowance

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 accounted for in the case of a salaried individual and a self-employed professional 

House Rent Allowance Section 10(13A)

HRA (house rent allowance) is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. On the other hand, self-employed professionals cannot be considered for HRA exemption under this act, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.

Dependent factors in calculating HRA for the salaried individual

When you are calculating HRA for tax exemption, you take into consideration four aspects which includes salary, HRA received, the actual rent paid and where you reside, i.e., if it is a metro or non-metro. If these aspects remain constant through the year, then tax exemption is calculated as a whole annually, if this is subject to change, as in a rent hike, pay hike or shift in residence etc., then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.

The place of residence is significant in HRA calculation as for a metro the tax exemption for HRA is 50% of the basic salary while for non-metros it is 40% of the basic salary. This holds true especially when you work at a metro and reside at a non-metro. In this case, your city of residence only will be considered for calculating your HRA,

 Rent paid  to my parents or spouse to avail HRA benefits

You can pay rent to your parents, however, they need to pay tax on the same or account the same in calculating their taxable income.

On the other hand, you cannot pay rent to your spouse. In view of the relationship when you take up residence together, you are expected to do so and hence such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny, so steer clear of these.

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