House Rent Allowance (HRA) serves as a significant component of many employees' compensation packages, aiming to cut down on the burden of rental expenses. However, what makes HRA even more appealing is its exemption from income tax under certain conditions outlined in the Income-tax Act. However, it is important to note that the exemption is available only under the Old Tax Regime

In this article, we'll explore the intricacies of HRA exemption.

What is HRA Exemption?

HRA exemption is governed by Section 10(13A) of the Income-tax Act and Rule 2A of the Income-tax Rules. To qualify for exemption, certain conditions must be met:

• Actual HRA Received: Employees must receive HRA from their employers for the period they occupy rented accommodation.
• Expenditure on Rent: The exemption is allowable only when the actual expenditure has been incurred on payment of rent for the accommodation occupied by the employee. .
• Limit on Exemption: Least of (A), (B) and ( C) below:-

Example 1: HRA Exemption in Delhi (Metropolitan City)

Consider an employee in Delhi receiving a monthly HRA of ₹25,000, with a monthly rent payment of ₹20,000. The Basic Pay plus Dearness Allowance amounts to ₹60,000 per month. He received HRA for the entire financial year and also occupied residential accommodation in Delhi for the entire financial year.

(A) Actual HRA Received: ₹25,000 × 12 = ₹3,00,000/-

(B) actual expenditure on Rent: [₹20,000 × 12] = ₹2,40,000 (- ) ₹72,000 [ 10%= ₹7,20,000 (₹ 60,000x 12 )] = ₹1,68,000 (Exceeds one-tenth of salary)

(C) 50% of Basic pay plus dearness allowance = ₹ 60,000x 12 x50% = ₹3,60,000/-

HRA Exemption: ₹1,68,000/- Expenditure on Rent exceeds 10% of salary [ Lowest of (A),( B) and (C)]

Modified Example-1

Let's modify the example, considering the employee was employed for only 8 months during the financial year. The steps remain the same, but the calculations will be adjusted for the 8-month period.

Given details:

• Monthly HRA received: ₹25,000
• Monthly rent paid: ₹20,000
• Monthly Basic Pay plus Dearness Allowance (DA): ₹60,000
• The employee was employed in Delhi for 8 months during the financial year.

1. Actual HRA Received

The total HRA received for 8 month period is =₹25,000×8= ₹2,00,000

2. Rent Paid minus 10% of Salary

First, we calculate the rent paid for the 8-month period:

• Rent Paid= ₹20,000×8= ₹1,60,000

Next, we calculate 10% of the salary for the 8-month period (Basic Pay + DA):

Salary for 8 months= ₹60,000×8= ₹4,80,000

• 10% of BP+ DA of ₹4,80,000 = 48,000
• Now, subtract 10% of the BP+DA for the 8 month period from the rent paid:
• Rent Paid minus 10% of BP+DA = ₹1,60,000 (-) ₹48,000 = ₹1,12,000

3. 50% of Salary

50% of BP+DA for 8 months of ₹4,80,000 = 2,40,000

Least of the Three Components

We now have the three components:

• Actual HRA Received: ₹2,00,000
• Rent Paid exceeds 10% of BP+DA: ₹1,12,000
• 50% of Salary: ₹2,40,000
• The least of these three amounts is ₹1,12,000, hence, the exempt portion of the HRA for the 8-month period is ₹1,12,000.

Example 2: HRA Exemption—non-metropolitan city

Now, let's consider the same scenario for an employee in Bangalore. The monthly HRA remains ₹25,000, with a monthly rent payment of ₹15,000. The Basic Pay plus Dearness Allowance amounts to ₹40,000 per month.

(A) Actual HRA Received: [₹25,000 × 12] = ₹3,00,000 per annum

(B) Expenditure on Rent: ₹15,000 × 12 = ₹1,80,000 (- )₹48,000 [10% of BP+DA of ₹4,80,000) = ₹1,32,000 (Exceeds one-tenth of salary)

(C) 40% of Basic pay plus DA [ 40% of ₹4,80,000] = ₹1,92,000/-

HRA Exemption= ₹1,32,000/- Least of (A),( B) and ( C)

Conclusion

Knowing the details of the HRA exemption can significantly impact your tax liabilities. By leveraging the prescribed rules, taxpayers can optimize their tax savings. It's important to maintain accurate records and seek guidance from tax professionals to ensure compliance and maximize HRA benefits.

(Disclaimer: This article is for informational purposes only and not financial or tax advice. Tax laws change, and strategies may vary based on individual circumstances. Consult a tax professional before making investment decisions.)

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