Salaried individuals normally get House Rent Allowance (HRA) as a component of their salary which is partly exempt from income tax subject to certain conditions, stipulated in Section 10(13A) and Rule 2A of the Income Tax for such exemption.
Basic Conditions for HRA Exemption:
As per Section 10(13A) of Income Tax Act, the following basic conditions are pre-requisite for HRA exemption:
(a) the residential accommodation occupied by the assessee should not be owned by him;
(b) the assessee should actually incur expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him.
Quantum of HRA Exemption
As per Rule 2A of Income Tax Rules, the HRA Exemption is restricted to the least of following:
1. the actual amount of HRA received by the assessee in respect of the relevant period; or
2. the amount of rent paid above 10% of salary*; or
3. an amount equal to 40% of salary* (50% where such accommodation is situated at Chennai, Delhi, Kolkata or Mumbai).
* salary includes basic salary and dearness allowance (DA), as explained below:
Meaning of Salary for HRA Calculation
As per Rule 2A of Income Tax Rules, salary for the purpose of HRA exemption under Section 10(13A) shall include basic salary as well as dearness allowance, if the terms of employment so provide. It shall also include commission based on a fixed percentage of turnover achieved by an employee as per terms of contract of employment but shall exclude all other allowances and perquisites.
In view of Explanation (ii) to rule 2A, basic pay, dearness allowance and commission are determined on ‘due’ basis in respect of the period during which rental accommodation is occupied by the employee in the previous year.
Thus, emoluments of a period other than previous year are not to be considered, even though such amount is received (as well as taxed) during the previous year. Again, emoluments of the period during which rental accommodation is not occupied in the previous year are left out of computation. It is important to note that where rent paid is 10 per cent or less than 10 per cent of salary, no exemption will be admissible. Again exemption is denied where an employee lives in his own house, or in a house for which he does not pay rent.
In short, the HRA Exemption under Section 10(13A) of the Income Tax shall be the least of actual HRA received, rent payments above 10% of salary, or 50% of salary where rented accommodation is situated in Chennai, Delhi, Kolkata or Mumbai (40% in the case of all other cities).
In the income tax schedule 10(13a), it is given that HRA exemption is calculated from minimum of the following three components the (i) HRA received, (ii) rent paid less 10 % of salary, (iii) 40% or 50% of salary ?. Since out of all three components, rent paid less 10% of salary is the minimum of all cases. It is known that HRA received is always either 10% or 20% or 30% and 40% and 50% salary will be greater than 2nd component i.e., rent paid less 10 % of salary. If it so, why are other components considered? Could you please explain the logic behind this?
While it’s true that “rent paid minus 10% of salary” is often the lowest, it’s not always the case. For example:
i) If someone receives very low HRA, then actual HRA received becomes the limiting factor.
ii) If someone pays very high rent, then 50% of salary might be the lowest.
iii) If someone lives in a non-metro city and pays moderate rent, then rent paid minus 10% of salary might be the lowest.
So, the law is designed to cover all scenarios and ensure fairness. It’s not assumed that one component will always be the lowest.