Refer website to a friend

Apply
for
Financial Planning

Financial Planning

Join The Discussion Now
Visit Financial Planning Forum. Discuss with experts and fellow consumers how to select the best Financial Planner.
Other Popular Articles
print Email
Posted On: 27-Jan-2009

Tax Tips - Tell me..."What do I need to know about HRA and taxes?"

House rent allowance (HRA) is given by the employer to the employee to meet expenses in connection with the rent of accommodation that the employee might have to take for a property that is not owned by the employee.

Watch the video

How is HRA calculated?

The calculation of HRA is simple. It is the least of the following three limits:

  1. Rent paid in excess of 10% of salary
  2. 40% of salary (50% if the property is located in Delhi/Mumbai/Kolkata/Chennai)
  3. Actual allowance received from the employer

Salary for the purposes of this calculation is the sum of the following:

  • Basic salary
  • Dearness allowance, if being paid by employer
  • Commission if given as a fixed percentage of the turnover achieved by the employee
OK, but show me an example.

Ramesh received the following (in Rs.):

Basic salary 8,000
HRA 5,500
Dearness Allowance 2,200

He also received a commission of 3% on a turnover of Rs. 60,000 achieved by him during the year. Ramesh has taken a apartment in Delhi on a rent of Rs. 6,200. Now lets try and compute HRA exemption for Ramesh.

Salary for the purpose of HRA exemption shall be (in Rs.):

Basic salary: 8,000
DA: 2,200
Commission 1,800 (3 % of 60,000)
Total 12,000

Now the HRA exemption for Ramesh shall be least of the following:

  1. Rent paid (Rs. 6,200) in excess of 10 % of Salary (Rs. 1,200) i.e Rs.5,000
  2. 40% of Salary (50% if rented premises situated in Delhi/Mumbai/Kolkata/Chennai ). Since the apartment is in Delhi the limit of 50% shall apply, i.e., Rs. 6,000
  3. Actual HRA received, i.e., Rs. 5,500

The least of the above three limits is Rs. 5,000. This amount will be exempt, and the taxable amount shall be HRA received minus HRA exempt, i.e., Rs 500 (Rs. 5,500 less Rs. 5,000).

Can I claim HRA exemption if I am staying in a property belonging to my parents or my spouse?

As we discussed above, HRA exemption is allowed if you are offered HRA as a part of your salary package and you are paying rent for a house that does not belong to you.

If you are living in a house owned by your parents or spouse and you are paying rent to them then you can certainly claim HRA. However, the rental income that they earn must be shown by them as income in their tax return to avoid any problems in their tax return.

Tax Tips - Tell me..."What is my TDS status if I have worked for two employers?"
Tax Tips Video
What is Tax Planning?

Can I claim HRA exemption along with other home loan tax benefits?

Yes, it is possible for you to claim HRA along with home loan benefits. Home loan repayment tax benefits are available as a deduction for repayment of home loan in India. If your employment requires you to be in different location or city as a result of which you cannot occupy your own house and end up living in a rented accommodation then you can certainly claim both the benefits.

Free Tax Advice
for Tax Savings
Hurry to book appointment with iTrust Tax Experts
Call now 0124 - 478 - 0222
Save upto Rs.1 Lakh in Taxes
If you liked this article, you might also want to read:

Comments
post new comment      Ask a question
Manoj Kumar said :
08/06/2010 		Sir Where you were. Income tax was a black box for me. But after reading your articles i gain a lot of knowledge. Keep writing
Amit Mishra said :
07/12/2009 		Dear Sir, Please help me for clearing this doubt.... I am working with a government(PSU) company since last three years. As all of you must be aware of this 6th pay commision and all that. Last month, 6th pay commision was implemented in my company and my basic salary has been increased from Rs12000 to Rs31000 and DA as per applicable rates(Q1-18%, Q2-21%, Q3-27%) given in 6th pay commission letter. I am eligible for 20% of basic salary (BP) as HRA so my HRA is increased from Rs2400 to Rs 6200 etc. As 6th pay commission was due from 1.1.2007 and I got all my arrears related to my (BP DA) and all this showing in my annual income of this financial Year(2009-10). As per 6th pay commision, all allowances arrears shall be paid from november 2008 and onwards. I am living in rented house and paying Rs6500 as rent. As per this, I am claiming Rs 78000 for tax exemption but as per my employer, I am only eligible for Rs 11000 for tax exemption. I could not understand this. I read IT rules regarding this, I am coming in following category. "excess amount of 10% annual salary can be tax exempted" Now my problem stars: My employer is considering all my salary which I got as arrear for previous year. Is it correct? My doubt is:- 1) I am claiming HRA tax exemption in this Financial year so total annual salary shall be calculated in this financial year or including my arrears also. Is it correct to consider arrears of BP DA for last thress years for my HRA tax exemption? 2) As per my opinion, I got Allowances arrears(HRA) from Nov 2008, so as per this Salary between from Nov 2008 to March 2010 shall be consider for HRA tax exemption and 10% of salary shall be calculated of this period. Am I correct? Its making huge difference eg My annual BP DA=Rs 480000....10%of this=Rs48000 My actual HRA claimed=Rs78000 Tax Exemption amt=78000-48000=Rs30000 and my employer is considering only Rs11000 .... Please reply as soon as possible..it's urgent for me.. Please understand my problem..