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Apr 29, 2010

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

Source:The Economic Times


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