How much of your HRA is tax exempt?
Look at your salary slip. Are you getting a House Rent Allowance (HRA) and do you know how it works? Do you understand that even small changes can affect your eligibility for HRA? Here we demystify the rules surrounding HRA so that you can avail of this exemption in the most tax-efficient manner. What is HRA? How is it calculated?
HRA is an allowance given by an employer to an employee to meet the latter’s rental accommodation expenses. The employee must not be the owner of this property.
The calculation of HRA is quite simple. As an employee, you need to submit the rent receipts to your employer showing the amount of actual rent paid. The amount of allowance is the lowest of the following three limits: rent paid less 10 per cent of salary; 40 per cent of salary (or 50 per cent if the rented premises are in Delhi, Mumbai, Chennai, or Kolkata); or actual HRA received from the employer.
How is salary defined for HRA purposes? Is it salary paid or taxable salary?
Actually, it is none of the above. For the purpose of HRA calculations, salary is defined as: basic salary; plus dearness allowance, if provided; plus commissions earned, if given as a fixed percentage of turnover achieved by employee.
An illustrative example
Rajan, an advertising salesman for a media company, lives in a rented accommodation in Delhi. He pays a rent of Rs 10,000 per month. He receives the following as his salary: his basic salary is Rs 12,000; dearness allowance is Rs 4,000; and HRA is Rs 8,000.
In addition, Rajan also receives a monthly commission of 3 per cent on an average monthly turnover of Rs 3 lakh achieved by him. This amounts to Rs 9,000 per month.
Rajan’s salary for the purpose of HRA exemption will be:
Basic salary: Rs 12,000
Dearness Allowance: Rs 4,000
Commissions earned Rs 9,000
Total salary: Rs 25,000
The HRA exemption will be the lowest of the following:
• Rent paid less 10 per cent of salary = Rs 10,000 less Rs 2,500 = Rs 7,500
• 40 per cent of salary (or 50 per cent if the rented accommodation is in Delhi, Mumbai, Chennai or Kolkata): Since the rented premises are in Delhi the 50 per cent limit applies = Rs 12,500
• Actual HRA received from the employer = Rs 8,000
The lowest of the above three amounts is Rs 7,500. This amount is exempt. The taxable amount is HRA received (Rs 8,000) less HRA exempt (Rs 7,500) = Rs 500.
What factors is HRA exemption sensitive to?
HRA exemption is based on four elements: rent paid; location of the premises; salary received, including commissions earned; and actual HRA received. If any of these items changes, then HRA computation also changes. Therefore, it is advisable to calculate HRA exemption separately for each period during which there is a change in any of the above factors.
If you stay in a property owned by your parents or spouse, can you still claim HRA?
To claim HRA, you must be offered HRA as a part of your salary, and you must be paying rent for a property that does not belong to you. If you live in a property owned by your parents or spouse, and you pay rent to them, then you can claim HRA. However, you must remember that this rental income paid to them needs to be shown as income in their tax return.
Suppose you own a house and you get a tax benefit on your home loan. Can you still claim HRA?
As long as you meet the criteria for both a home loan deduction and HRA exemption, you can get tax benefits on both. Home loan related tax benefits are available on repayment of principal and payment of interest on the loan. If you happen to live in a house that is not owned by you, and you pay rent for it, then if you are being offered HRA as a part of your salary, you can claim the HRA exemption. You might be living in rented accommodation in an area that is far away from your own property because of employment-related reasons, or in a different city altogether.
The authors are co-founders of iTrust Financial Advisors, one of India's leading independent financial advisory service companies (www.iTrust.in)
Courtesy :Indian Express