Implications of House Rent Allowance

An employee may receive House Rent Allowance ( H.R.A.) as part of his/her Salary Income. Income Tax treatment for this comes under 2 categories:-

1. For an employee leaving in his/her own house or in a house for which he/she does not pay any rent –NO EXEMPTION IS AVAILABLE. That is, the entire allowance received forms part of his/her taxable income.

2. For an employee leaving in a rented house, exemption in respect of House Rent Allowance is regulated by Rule 2A and Section 10(13A) of the Income Tax Act. The least of the following is exempt from tax-

• An amount equal to 50% of salary, where the residential house is situated at Mumbai , Kolkata, Delhi or Chennai and an amount equal to 40% of salary where the residential house is situated at any other place;
• House Rent Allowance received by the employee in respect of the period during which the rental accommodation is occupied by the employee during the previous year;
• The excess of rent paid over 10% of “Salary”.

“Salary” for the above purpose means Basic Salary and includes Dearness Allowance if 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.

Here is a simple example to illustrate the tax treatment of HRA:

Mr. X, who resides in Mumbai, gets Rs.25000/- as Basic Salary. He/she
receives Rs.6000/- as HRA.Rent paid by him/her is Rs.7500/-.

Therefore his/her taxable HRA would be:

Out of Rs.6000/- received as HRA, the least of the following is exempt from Tax:-

• Rs.12500/- being 50% of salary;
• Rs.6000/- being HRA received.
• Rs.5000/- being excess of rent paid over 10% of salary.
• In this case, Rs.5000/- is exempt from tax.

An employee has to declare his/her rent paid amount during the year and usually has to provide rent paid Receipts to his/her employer for the purpose of calculating Income Tax and TDS on Income for the year. These days most Corporate Employers usually have a portal/window where they can make these declarations online along with other Investments made for the year.

- Rittique Phukan (views expressed in the article are that of the author)