Meaning of House Rent Allowance and HRA Exemption Calculation

What do we mean by House Rent Allowance i.e. Meaning of HRA and How to do HRA Exemption calculation u/s 10(13A) of Income Tax Act in India? House rent allowance (HRA) means allowance given by the employer to his employee to pay the rent of the house in which he lives, during the year in which he has given the services to employer. So HRA is taxable if employee lives in a house for which he pay no rent or lives in his own house.

So to prove that one has paid the rent to landlord one should take the rent receipt from landlord and also note that if rent paid during the year is more than Rs 1,00,000/- (Previously its was Rs 180,000/-) one has to take PAN card details from landlord and that should be given to employer with this income declaration for the current year, in case Landlord is not having PAN Number than employee must take the declaration from landlord that he don’t have PAN Number. To avoid any future problem related to HRA one must enter into rent agreement with landlord for house rent which will act as evidence at the time of assessment with income tax authority. 

Important Points related to House Rent Allowance

  1. Conditions for claiming HRA are living in rented apartment/house/property and paying rent for such apartment/house/property for that stay.
  2. HRA exemption will be calculated or allowed for period of stay in that house
  3. For exemption calculation place of residence is considered for example office of employee is in Delhi but stays in Noida than deduction will be calculated @40%.
  4. HRA Exemption can be claimed even if you are paying rent to your parents but you can’t claim HRA exemption for rent payment to wife.
  5. Proof of rent payment is required, if your HRA receipt is above Rs 3000/-pm. Proof can be rent receipt or even bank statement can be accepted if not rent receipt if available.
  6. HRA exemption is allowed to salaried individual’s only so self employed or businessmen can’t claim HRA but they can claim deduction for rent payment under section 80GG.
  7. You can claim both HRA and home loan benefit under section 24(b) & 80C .i.e. claim deduction for interest payment on home loan under Income from house property head and Section 80C deduction for repayment of principal repayment. But condition is that you should leave in rented apartment and pay rent on same and such rented place should not be situated to near to your own house (it must be genuine stay), so your own property can be vacant or rented and it can be in same city or different city it make no difference.

Calculating House Rent Exemption under section 10(13A) of Income Tax 

  1. Person is not paying rent : Fully Taxable
  2. Person is paying rent:

    Least is exempt from below three options

  • Actual Receipt in respect of relevant period
  • Actual Rent paid Less: 10% of salary of relevant period
  • 40% of salary / 50% 0f salary where residential house is situated in Mumbai, Kolkata, Delhi or Chennai

Important Notes:-

  1. Salary means= Basic pay + D.A.(if) + % commission (only if fixed percentage of turnover)
  2. Calculation for HRA is based on four factors;
    1. Actual receipt
    2. Rent paid
    3. Place of residence
    4. Salary earned
  3. If there is any change in any of the above factors, then it should be separately calculated till the next change.

Reference: Section 10(13A) of Income Tax Act, 1961

(13A) any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant considerations.

Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—

(a) the residential accommodation occupied by the assessee is owned by him ; or

(b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him ;

Reference: Rule 2A prescribes the quantum of exemption available, which will be the least of the following :

Bombay/Calcutta/Delhi/MadrasOther Cities
■ Allowance actually received■ Allowance actually received
■ Rent paid in excess of 10% of salary■ Rent paid in excess of 10% of salary
■ 50 per cent of salary■ 40 per cent of salary

‘Salary’ for this purpose includes basic salary as well as dearness allowance if the terms of employment so provide. It also includes commission based on a fixed percentage of turnover achieved by an employee as per terms of contract of employment but excludes all other allowances and perquisites. In view ofExplanation (ii) to rule 2A, basic pay, dearness allowance and commission are determined on ‘due’ basis in respect of the period during which rental accommodation is occupied by the employee in the previous year. Thus, emoluments of a period other than previous year are not to be considered, even though such amount is received (as well as taxed) during the previous year. Again, emoluments of the period during which rental accommodation is not occupied in the previous year are left out of computation. It is important to note that where rent paid is 10 per cent or less than 10 per cent of salary, no exemption will be admissible. Again exemption is denied where an employee lives in his own house, or in a house for which he does not pay rent.

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