HRA EXEMPTION RULES: HOW TO SAVE TAX ON HOUSE RENT ALLOWANCE

by sangam D on October 12, 2018 in INCOME TAX

HRA was at 30% for X (population of 50 lakh & above), 20% for Y (5 to 50 lakh) and 10% for Z (below 5 lakh) category of cities but the seventh pay commission has reduced the existing rates to 24% for X, 16% for Y and 8% for Z category of cities.

HRA, unlike basic salary, is not fully taxable. Subject to certain conditions, a part of HRA gets exempted under Section 10 (13A) of the Income-tax Act, 1961.

HOUSE RENT

Who can avail HRA?

The tax benefit is available only to a salaried individual who has the HRA component as part of his salary structure and is staying in a rented accommodation. Self-employed professionals cannot avail the deduction.

How much is exempted?

The exemption for HRA benefit is the minimum of:

i) Actual HRA received

ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and

iii) Excess of rent paid annually over 10% of annual salary. For calculation purpose, the salary considered is ‘basic salary’. In case ‘Dearness Allowance (DA)’ (if it forms a part of retirement benefits) and ‘commission received on the basis of sales turnover’ is applicable, they too are added to compute the minimum HRA exemption available.

Example of HRA calculation:

Let’s say an individual, with a monthly basic salary of Rs 15,000, receives HRA of Rs 7,000 (an arbitrary figure) (Annual-12*7000 =84000) and pays Rs 8,400 (Annual -12*8400=1,00,800) rent for an accommodation in a metro city. The tax rate applicable to the individual is 20 percent of his income (If he is under 20% slab of income tax).To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:

i) Actual HRA received = Rs 84,000
ii) 50% of salary (metro city) = Rs 90,000 (50% of Rs 1,80,000)
iii) Excess of rent paid annually over 10% of annual salary = Rs 82,800 (Rs 1,00,800 – (10% of Rs 1,80,000)

It shows that of Rs 84,000 actually received as HRA, Rs 82,800 gets tax exemption and only the balance of Rs 1,200 gets added to the employee’s income, on which a tax of Rs 240 ( 20 per cent slab ) gets payable.