HRA (House Rent Allowance) is a payment given by an employer to an employee, so that employee can live in a rental house. Whole amount received from the employer is not fully taxable because under Section 10(13A) of Income Tax Act employees can avail exemption on HRA (House Rent Allowance).

A major amount of it is exempted as per Section 10(13A) and the rest amount is taxable. So in this way employees can save a huge tax.

But remember to avail this exemption you must take care of certain rules or conditions, which is necessary for claiming HRA exemption otherwise your HRA exemption may be loose.

Following we have explained all in detail about HRA (House Rent Allowance) exemption rules, formula & calculation.

     

    What is HRA?

    Full form of HRA is House Rent Allowance. HRA is a payment which is given by the employer to employees for taking house on rent.

    House Rent Allowance (HRA) Exemption under section 10(13A)

    Generally it happens when employees live in rented houses because sometimes postings of employees are in those cities, where they have no own house and they take houses on Rent.

    Many companies provide HRA which is a part of the salary of employees.

     

    What is the taxability of House Rent Allowance (HRA)?

    House Rent Allowance is provided as a part of salary and hence it is taxable in the hand of employee because it is an income received by employee.

    But if an employee lives in a rental house and is paying the rent then he can claim exemption under section (13A) of the rent amount which he has paid. In this way he can save tax.

    But if he lives in his own house, then he cannot take exemption, then in that case the whole HRA received by him is fully taxable without any exemption.

    But in some cases it may be possible that he has his own house but after posting in other cities he has to live in a rental house. In that case also he is eligible for taking exemption under section 10(13A).

    Also Read: Section 80C Deduction: 9 Types of TaxSaving Investments

     

    Who is eligible for availing exemption of HRA under section 10(13A)?

    Eligibility of availing exemption under section 10(13A)

    Every employee who is receiving HRA can avail exemption but the condition should be satisfied.

    Condition of availing exemption of HRA is that you must live in a rented house and pay the rent. You must not have any house owned in the city in which you are posting.

    Example: Mr. A has owned a house in Punjab but due to posting in Delhi. He lives in a rented house in Delhi. Then he can avail exemption.

    Payment of rent is compulsory for availing exemption.

     

    What are the rules & formula for HRA exemption under section 10(13A)?

    Exemption of HRA is availed from the House Rent Allowance amount before computing Gross Total Income.

    Exemption under section 10(13A) can avail on the basis of the city in which you are living in a rented house.

    Delhi, Mumbai, Kolkata and Chennai are covered under Metro cities. So exemption available is also different for Metro cities and other than metro cities.

    In case of Metro Cities (Delhi, Mumbai, Kolkata & Chennai)

    In case of other than Metro Cities

    Least of the following amount is exempt from HRA:

    • Actual HRA received
    • Rent paid by employee – 10% of salary (for relevant period)
    • 50% of salary (for relevant period)

    Least of the following amount is exempt from HRA:

    • Actual HRA received
    • Rent paid by employee – 10% of salary (for relevant period)
    • 40% of salary (for relevant period)

     Note: Exemption will be allowed for the relevant period.

    Example:

    If during FY 2020-21, Mr. A lives in a rented house for only 5 months then for the calculation purpose of exemption salary and rent paid is taken only for the relevant period i.e. for 5 months.

    Also Read: Deduction under Section 80G and 80GGA of Income Tax Act

     

    How to calculate HRA for exemption under section 10(13A)?

    For the calculation of HRA exemption salary means:

    Basic pay + Dearness Allowance (which form part of retirement benefits) + commission (if based on a fixed % on turnover)

    By taking summations of all the three you will get salary for the calculation purpose for HRA exemption.

    Example:

    Mr. X is a government employee and received salary which includes:-

    Basic Pay

    Rs.12000 p.m.

    Dearness allowances

    Rs.5000 p.m.

    HRA

    Rs.8000 p.m.

    Other allowances

    Rs.10000 p.m.

    Total salary

    Rs. 35000 p.m.

    He lives in a rented house in Delhi and he pays 7000 rent per month. So in this case, how to compute exemption of HRA under section 10(13A)

    Solution:

    Before computing exemption we should calculate the salary for the purpose of calculating exemption of HRA.

    Particulars

    Amount Rs.

    Basic Pay (1200*12)

    144000

    Dearness Allowances (5000*12)

    60000

    Salary for HRA purpose

    204000

     

    HRA Calculation for Exemption under section 10(13A)

    Least of the following is exempt:-

    1) Actual HRA received = 96,000 (8000*12)

    2) Rent paid by employee – 10% of salary

    = (7000 * 12) - 10%  2,04,000

    = 84,000-20,400

    = 63,600

    3) 50% of salary

    =50% of 2,04,000

    =1,02,000

    Least of the above is 63,600. So, Rs. 63,600 is the exemption amount.

    Now, calculation of Total Salary Income of Mr. X will be

    Particulars

    Amount Rs.

    Basic Pay (12000*12)

    144000

    Dearness allowances (5000*12)

    60000

    HRA received (8000*12)= Rs.96000

    Less: Exemption = (63600)            

    32400

    Other allowances (10000*12)

    120000

    Income under the head salary

    356400

    Also Read: Income Tax Slab Rates: Individual, Senior Citizens (FY 2021-2022)


    When landlord PAN is required for claiming HRA exemption?

    Generally you can claim exemption of HRA under section 10(13A) without any requirement of landlord PAN. But if you are paying rent in excess of Rs. 1 Lac annually then landlord PAN is required.

    You cannot claim exemption of HRA if you are not providing PAN of your landlord in case you are paying rent in excess of Rs.1 Lac.

     

    What happens if the employer does not pay HRA?

    Case 1: Employer does not pay HRA but you are living in a rented house.

    In such a case you cannot claim exemption under section 10(13A). But for this a separate deduction is available of rent paid by you even if the employer does not provide any HRA.

    For more details Read section 80GG:- 

    Case 2: Employer does not pay HRA but in place of it he provides Rent Free Accommodation (RFA):

    If the employer pays Rent Free Accommodation then it is treated as your perquisites and taxable as a part of your salary. Rent free accommodation can be further provided for

    • Accommodation owned by the employer
    • Accommodation Hired by the employer

    And out of which how much an amount becomes your perquisite depends on whether the accommodation is furnished or unfurnished.

    So, the perquisite is taxable without any exemption.

    Also Read: Section 80E – Deduction of Interest Payment on Education Loan

     

    Summary

    HRA (House Rent Allowance) is provided by the employer to the employee as an Allowance so that employee can live in a rented house in the place where he works. But the fulfillment of certain rules & conditions are necessary to avail exemption under section 10(13A).

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