Income from Salaries, Income Tax, Individuals

IncomeTax/Individuals/Allowances/House Rent Allowance/FAQs

1.   What is the amount of exemption in respect of house rent allowance?

As per section 10(13A) and Rule 2A, exemption in respect of HRA is least of the following amounts:

  • 50% of salary, when residential house is situated at Mumbai, Kolkata, Delhi or Chennai and 40% of salary where residential house is situated at any other place.

  • HRA actually received by the employee in respect of the period during which rental accommodation is occupied by him and rent expenditure was incurred by him, during the previous year.

  • Rent paid in excess of 10% of salary.

2.    While determining salary to be used for computation of exemption in respect of house rent allowance what is the meaning ofsalary?

Salary for the purpose of computing exemption in respect of house rent allowance will include basic salary, dearness allowance forming part of salary while computing all retirement benefits and commission based on fixed percentage of turnover achieved by the employee. Apart from this, salary for this purpose does not include any other allowance/perquisites. Consider following example for better understanding:

Example : Mr. Kumar is Production Manager in Essem Ltd. The company is paying him following :

  • Basic salary of Rs. 84,000 per month.

  • Dearness allowance of Rs. 25,200 per month. This amount is considered as salary while computing all retirement benefits.

  • Dearness allowance of Rs. 20,000 per month. This amount is not considered as salary while computing all retirement benefits.

  • Fixed monthly commission of Rs.1,000.

  • Apart from monthly commission of Rs. 1,000, he is also entitled to 1% commission on turnover achieved by him. Turnover achieved by him during the month of April amounted to Rs. 2,00,000. Commission on Rs. 2,00,000 @ 1% will amount to Rs. 2,000.

  • Value of perquisite arising from free use of motor car provided by the employer amounted to Rs. 4,000 per month.

  • House rent allowance of Rs. 6,000 per month.

In this case, while computing exemption in respect of house rent allowance, salary will be computed as follows :

Particulars

(Rs.)

Basic salary (it is considered while computing exemption in respect of house rent allowance)

  84,000

Dearness allowance forming part of salary while computing retirement benefits, i.e., DA ( considered while computing exemption in respect of house rent allowance)

    25,200

Dearness allowance not forming part of salary while computing retirement benefits, i.e., DA (not considered while computing exemption in respect of house rent allowance)

    ———-

Fixed monthly commission (not considered while computing

 

exemption in respect of house rent allowance)

———-

Commission based on fixed percentage of turnover achieved by the employee (considered while computing exemption in respect of house rent allowance)

    2,000

Perquisite on account of car provided by the employer (perquisites are not considered while computing exemption in respect of house rent allowance)

    ———-

Salary for the purpose of computation of exemption in respect of house rent allowance

1,11,200

3.    While determining salary to be used for computation of exemption in respect of house rent allowance, salary for which period is to betaken?

While determining salary to be used for computation of exemption in respect of house rent allowance, salary shall be computed on due basis in respect of period during which the accommodation is occupied by the employee in the previous year. Hence, any payment not pertaining to the previous year or not pertaining to the period of occupation of the accommodation shall be excluded.

Example

Mr. Krunal is working in Essem Ltd. at a monthly salary of Rs. 84,000 (basic salary) and dearness allowance Rs. 16,000 (considered as salary for computing retirement benefits). During the month of March, 2013, Mr. Kapoor received advance salary for the month of April, 2013. In this case, while computing exemption in respect of house rent allowance for the month of March, 2013, advance salary of April, 2013 will not be considered. In other words, while computing exemption in respect of house rent allowance for the month of March, 2013, salary will be taken as Rs, 1,00,000 (i.e., basic salary and DA only for the month of March,2013).

4.    What points are to be kept in mind while making practical implication of the provisions of computation of exemption in respect ofHRA?

Exemption in respect of house rent allowance depends on following four things, viz. :

  • Salary of the employee

  • House rent allowance received by the employee

  • Rent of the residential accommodation

  • Place of residential accommodation

It should be noted that when salary, HRA, rent paid and place where house is taken on rent are same throughout the previous year, then the exemption should be calculated on “annual” basis. However, if there is change in any of them, then exemption shall be computed on a “monthly” basis.

Example

Mr. Sunil is employed in Essem Ltd. at a monthly salary of Rs. 84,000. Other details for the year are as follows :

  • House rent allowance Rs. 8,000 per month (remained same for the year).

  • Rent paid by him during the year amounted to Rs. 15,000 per month (remained same for the year).

  • Dearness allowance (i.e., DA) per month amounted to Rs. 16,000 (remained same for the year).

  • Throughout the year he was residing in Jaipur.

In the above example, all the four things, viz., salary, house rent allowance, monthly rent and place of accommodation remained same throughout the year. Hence, computation can be done on annual basis as follows:

Exemption in respect of house rent allowance will be lower of the following :

  • 40% of salary, since residential house is situated at Jaipur this will come to Rs. 4,80,000 (See note1)

  • Actual amount of HRA received by the employee for the year. Monthly HRA is Rs. 8,000. Hence, annual HRA will amount to Rs. 96,000.

  • Rent paid in excess of 10% of salary. This will amount to Rs. 60,000 (See note2)

Exemption in respect of HRA will be Rs. 60,000, being least of the above computed amounts. Taxable HRA for the year will be computed as follows :

Particulars

(Rs.)

Annual HRA (Rs. 8,000 × 12)

96,000

Less: Exemption in respect of HRA as computed as above

60,000

Taxable HRA

36,000

Note 1:

Salary for the purpose of computation of exemption in respect of house rent allowance will come to Rs. 1,00,000 per month (Rs. 84,000 basic salary and Rs. 16,000 dearness allowance). Annual salary will come to Rs. 12,00,000. 40% of salary will come to Rs. 4,80,000.

Note 2:

Rent paid in excess of 10% of salary will be computed as follows :

Particulars

(Rs.)

Annual rent (Rs. 15,000 × 12)

1,80,000

Less : 10% of annual salary of Rs. 12,00,000

1,20,000

Rent in excess of 10% of salary

60,000

Example

Suppose in the above example rent is increased from 1st July to Rs. 21,000 and DA is increased to Rs. 26,000 from 1st December, then annual computation cannot be done and same will be divided as follows :

  • Accumulated computation for the period of April to June.

  • Accumulated computation for the period of July to November.

  • Accumulated computation for the period of December to March

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