House Rent Allowance (HRA) : Calculation & Taxability

House Rent Allowance (HRA) is given by the employer to the employee to meet the expenses in connection with rent of the accommodation which the employee might have to take for his residential purpose. This House Rent Allowance so paid by the employer to his employee is taxable under head “Income from Salaries” to the extent it is not exempt u/s 10(13A)

 HRA received xxx
(Less) Exempt u/s 10(13A) (xxx)
(=) Taxable Amount xxx

The balance amount after claiming HRA Exemption would be added in the total salary of the employee and would be taxed as per the income tax slab rates. Recommended Read:-

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 3 amounts:-

  • Actual House Rent allowance received by the employee in respect of the relevant period
  • Excess of Rent paid for the accommodation occupied by him over 10% of the salary for the Relevant Period
  • 50% of the salary where the residential house is situated in Mumbai, Calcutta, Delhi or Chennai and 40% of the Salary where the house is situated at any other place for the relevant period.

Points to be noted

  1. Relevant period means the period during which the said accommodation was occupied by the assessee during the financial year.
  2. Salary for this purpose includes dearness allowance if the terms of the employment so provide but exclude all other allowances and perquisites. This dearness allowance will be included to the extent it is part of salary as per the terms of employment. All other allowances and perquisites will not be included.
  3. Where the employee has not actually incurred expenditure on payment of rent or stays in his own accommodation, no exemption of House Rent Allowance is available.
  4. If the Rent paid by the employee to his landlord is more than Rs. 1 Lakh in a year, the PAN Card No. of the Landlord would be required to be furnished (CBDT Circular)

house rent allowance House Rent Allowance (HRA) : Calculation & Taxability

Thus, the House Rent Allowance Exemption is based on the following factors

  1. Salary
  2. Place of Residence
  3. Rent Paid
  4. HRA Received

Since there is a possibility of change in any of the above factors during the previous year, exemption for HRA should not always be calculated on an Annual basis. As long as there is no change in any of the above factors, it can be calculated together for that period. Whenever, there is a change in any of the above factors, it should be separately calculated till the next change.

Illustration

Ram is entitled to a basic salary of Rs. 5,000pm and dearness allowance of Rs. 1000 per month, 40% of which forms part of Retirement Benefits. He is also entitled for House Rent Allowance of Rs. 2,000 pm. He actually pays Rs. 2000 pm as rent for a house in Delhi.

In the above scenario, we first have to calculate the salary of Ram

Salary (5000X12)                                                                       Rs. 60,000

Dearness Allowance (40% of 12,000)                                         Rs.   4,800

Total Salary for the purpose of computation of HRA                     Rs. 64,800

Now, the minimum of the following 3 amounts shall be exempted from tax

a)      Actual HRA Received (2000X12)                                                  Rs. 24,000

b)      Rent Paid in excess of 10% of salary (24000-6480)                     Rs. 17,520

c)       50% of Salary                                                                          Rs. 32,400

Therefore, Rs. 17520 shall be the House Rent Allowance (HRA) that is exempted from levy of income tax and the balance Rs. 6480 shall be included in the gross total salary.

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