Introduction
To reduce tax liabilities, employees often request or employers provide a bifurcation of their salary, allowing them to claim exemptions when calculating their income under the head of salary. The Income Tax Act provides various allowances for this purpose, one of which is House Rent Allowance (HRA). HRA enables taxpayers to reduce their taxable income.
Meaning of House Rent Allowance
House Rent Allowance is a special allowance granted by an employer to an employee to cover the cost of renting a residence.
Taxability of House Rent Allowance u/s 10(13A) of Income Tax Act 1961
Under Section 10(13A) of the Income Tax Act, the least of the following amounts is exempt:
i. House rent allowance actually received.
ii. Rent paid minus 10% of the salary.
iii. 50% or 40% of the salary, depending on the employee’s place of residence.
Important Notes:
i. Salary includes Basic salary, dearness allowance (if it forms part of retirement benefits), and a percentage-based commission on turnover.
ii. If an employee resides in their own house or doesn’t pay rent for their residence, no exemption is allowed.
iii. For employees residing in metropolitan cities (Delhi, Mumbai, Chennai, and Kolkata), 50% of the salary is considered for calculating the exemption for HRA; otherwise, 40% of the salary is used.
Example for Clarity
Question:
Mr. A receives a monthly HRA of ₹8,000 from his employer. His basic salary is ₹35,000 per month, dearness allowance is ₹7,000 per month (with 20% of DA forming part of retirement benefits), and he receives a monthly commission of ₹3,000. Assuming Mr. A lives in Delhi and pays monthly rent of ₹10,000 to his landlord, calculate the taxable amount of HRA in Mr. A’s hands.
Solution:
Computation of taxable HRA in the hands of Mr. A: The least of the following amounts is exempt u/s 10(13A):
i. HRA received (₹8,000 * 12) = ₹96,000
ii. Rent paid – 10% of salary (₹10,000 * 12 – 10% of (₹35,000 + 20% of ₹7,000) * 12) = ₹76,320
iii. 50% of salary (50% of (₹35,000 + 20% of ₹7,000) * 12) = ₹2,18,400
Exempt amount = ₹76,320
Taxable amount of HRA in the hands of Mr. A = ₹96,000 – ₹76,320 = ₹19,680
Commission is not considered in the salary calculation because it’s not percentage-based on turnover. Only 20% of DA is taken into account because it forms part of retirement benefits. Since Mr. A lives in Delhi, a metropolitan city, 50% of the salary is considered for the exemption calculation.
If the place of residence is not specified, assume it’s a metropolitan city.
Conclusion
Understanding the taxability of House Rent Allowance under Section 10(13A) of the Income Tax Act is essential for both employees and employers. Proper calculation and documentation are necessary to ensure compliance with tax regulations. In this case, Mr. A’s taxable HRA was calculated as ₹19,680.
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