Tax deduction HRA received by employee

Employees generally receive a house rent allowance (HRA) from their employers. This is a part of the salary package, in accordance with the terms and conditions of employment.

HRA is given to meet the cost of a rented house taken by the employee for his stay.

The Income Tax Act allows for deduction in respect of the HRA paid to employees. The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. It is to be noted that the entire HRA is not deductible.

HRA is an allowance and is subject to income tax. An employee can claim exemption on his HRA under the Income Tax Act if he stays in a rented house and is in receipt of HRA from his employer.

In order to claim the deduction, an employee must actually pay rent for the house which he occupies . The rented premises must not be owned by him. In case one stays in an own house, nothing is deductible and the entire amount of HRA received is subject to tax.

As long as the rented house is not owned by the assessee, the exemption of HRA will be available up to the limits specified in the relevant rules.

According to the Income Tax Act, the amount of HRA exempt is the least of: The actual amount of allowance received by the assessee in the relevant period during which the rented accommodation is occupied by him.

The amount by which the rent expenditure actually incurred by the assessee exceeds one-tenth of the amount of salary due to the assessee in the relevant period 40 percent of the salary due to the assessee in the relevant period.

To compute the amount salary means basic salary. It also includes dearness allowance if the terms of employment provide for it, and commission based on a fixed percentage of turnover achieved by the employee. The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.

Here is an illustration for the year 2009-10 .

Assume an assessee gets a salary of Rs 5 lakhs as basic salary and Rs 2.5 lakhs as HRA. He pays an actual rent of Rs 1.5 lakhs. In such a case, the amount of HRA exempt would be calculated as:

Actual HRA received - Rs 2.5 lakhs Excess of rent paid over 10 percent of salary i.e., Rs 1.5 lakhs less Rs 50,000 (10 percent of salary) - Rs 1 lakh 40 percent of salary (40 percent of Rs 5 lakhs) - Rs 2 lakhs As out of these Rs 1 lakh is the least, it will be allowable as a deduction from salary for the year. The balance HRA of Rs 1.5 lakhs will be subject to tax.

The deduction is allowable only for the period during which the rented accommodation is taken by the employee.
Source:The Economic Times