HRA Deduction under Income Tax Act

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In this article we are going to cover the House Rent Allowance HRA deduction under Income Tax Act.

What is House Rent Allowance (HRA)?

HRA is an allowance paid by the employer to his employee as a compensation for the rent paid by employee for his residence.

In the service industry we have seen that the employees have to provide their services to the employers at the location chosen by the employer which is mostly away from the home town of the employee. Thus to compensate for the inconvenience of shifting to another place and staying on a rented apartment, the employer pays HRA to the employee.

HRA is paid with salary as a percentage of basic pay. However there may be some exceptions where a fixed amount is paid each month.

HRA Deduction under Income Tax- Sec 10(13A)

Income Tax Act has allowed some deduction for HRA which is subject to certain restrictions. We will discuss the details of the calculation procedure below.

This deduction is covered under Section 10(13A) of the Income Tax Act. It is available to all employees whether in the Govt. or private sector.

Calculation of HRA Deduction under Income Tax

HRA deduction under Section 10(13A) of Income Tax Act is to be calculated as follows:

Rs.Rs.
House Rent AllowanceXXX
Less: Least of the following:
a. Actual HRA ReceivedXXX
b. Rent Paid – 10% of SalaryXXX
c. 40% of Salary (50% in case of Metro Cities)XXX
XXX
Taxable HRAXXX

 

Points to be remembered

The following points are to be noted:

  • “Salary” means Basic Pay + Dearness Allowance ( if it forms part of retirement benefits) and any commission based on a fixed percentage on turnover.
  • Salary is taken on accrual basis for the period for which HRA was received by the employee.
  • Actual rent should be paid by the employee for availing deduction under this section. If no rent is paid then no deduction is available.
  • This deduction can be calculated on annual basis. However, if there are changes in Salary, rent or HRA within the year then the calculation can be done monthly.
  • If an employee receives HRA which is allowed as deductible under this section then no deduction is allowed under Section 80GG.
  • If an employee does not receives HRA but pays rent for accomodation then he cannot enjoy deduction under Section 10(13A). In this case he can avail deduction u/s 80GG.
  • Deduction u/s 10(13A) and 80GG cannot be availed together.
  • No deduction will be available for any maintenance charges paid by the employee.

Examples for Calculation of HRA

Example 1: No change in Salary, HRA and Rent in a year

Salary (Basic + DA)50000*12600000
HRA6000*1272000
Rent in Kolkata8000*1296000

Solution:

Rs.Rs.
House Rent Allowance72000
Less: Least of the following:
a. Actual HRA Received72000
b. Rent Paid – 10% of Salary   [96000-(10% of 600000)]36000
c. 40% of Salary (50% in case of Metro Cities) [600000 x 50%]300000
 Least of a, b and c ———>36000
Taxable HRA (72000-36000)36000

* Since rent is paid in Kolkata, 50% of salary has been considered for point c above

Example 2: Change in Salary, HRA, Rent within a year

Salary for 1st 8 months50000*8400000
Salary for next 4 months55000*4220000
HRA for 1st 8 months6000*848000
HRA for next 4 months6600*426400
Rent for 1st 5 months7000*535000
Rent for next 7 months7300*751100

Solution

MonthHRA ReceivedRent paid – 10% of Salary40% of Salary (50% in Metro Cities)HRA

Exemption

April6000=7000-(50000*10%) i.e 2000=40% of 50000 i.e 200002000
May6000=7000-(50000*10%) i.e 2000=40% of 50000 i.e 200002000
June6000=7000-(50000*10%) i.e 2000=40% of 50000 i.e 200002000
July6000=7000-(50000*10%) i.e 2000=40% of 50000 i.e 200002000
August6000=7000-(50000*10%) i.e 2000=40% of 50000 i.e 200002000
September6000=7300-(50000*10%) i.e 2300=40% of 50000 i.e 200002300
October6000=7300-(50000*10%) i.e 2300=40% of 50000 i.e 200002300
November6000=7300-(50000*10%) i.e 2300=40% of 50000 i.e 200002300
December6600=7300-(55000*10%) i.e 1800=40% of 55000 i.e 220001800
January6600=7300-(55000*10%) i.e 1800=40% of 55000 i.e 220001800
February6600=7300-(55000*10%) i.e 1800=40% of 55000 i.e 220001800
March6600=7300-(55000*10%) i.e 1800=40% of 55000 i.e 220001800
 Total exemption24100

* Rent is assumed to be paid in a non-metro city.

How to show HRA deduction in Income Tax Return

There is no dedicated field to put HRA deduction amount in the income tax return. 

The amount of deduction has to be adjusted prior to calculation of income under the head salary. The final figure of income under the head salary calculated after giving effect of the deduction of HRA exemption has to be shown in the return.

Lets us consider an example where income under salary is Rs 100000. This Rs 100000 is including your HRA component but the exemption for HRA is not provided yet. Now suppose your exempt amount under Section 10(13A) comes to Rs 5000. So you will have to put Rs. (10000-5000) i.e Rs 95000 in the ‘Income under the Head salaries’ field in the Income Tax Return Form.

That was all about HRA deduction under Income Tax. If you like this article, consider sharing this with your friends. Thanks for reading!

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