Page 182 - DCOM301_INCOME_TAX_LAWS_I

Unit 7: Income under the Head Salaries

The house should not be owned by him or his spouse Notes
Assessee should be paying the rent.
Exemption limit in HRA: Minimum of the following three is exempt:
1. Actual HRA received
2. Rent paid minus 10% of Salary

3. 50% of salary if you live in Mumbai, Delhi, Kolkata or Chennai, otherwise 40% of
Salary

!

Caution Here Salary means Basic Salary + Dearness Allowance + Commission based on a
fixed percentage of turnover achieved by employee. Most of the private sector companies
don’t have the last two components in the salary package.
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.

Example: Anurag has a Basic Salary of ` 30,000 per month. For the year 2012–13 he
received HRA amounting to ` 10,000 per month. He paid rent worth ` 8,000 per month. His
House is located in Chennai. In this case the HRA exemption that can be claimed by Anurag is:
Solution:

Minimum of following will be exempt,
1. HRA actually received: ` 1,20,000
2. Rent less 10% of Salary: ` 96,000 – (10% of 3,60,000): ` 60,000
3. 50% of Salary: ` 1,80,000
Working Notes:

Actual HRA received = 10,000 × 12 = ` 1,20,000
Salary = 30,000 × 12 = 3,60,000. No DA and Commission details given.
Rent Paid = 8,000 × 12 = 96,000
Thus ` 60,000 HRA is exempt and balance ` 60,000 HRA is taxable.

Example: Ankush is entitled to a basic salary of ` 5,000 per month and a DA of ` 1,000 per
month, 40% of which forms part of retirement benefit. He is also entitled for House Rent
Allowance of ` 2,000 per month. He actually pays ` 2,000 per month as rent of the house in Delhi.
Solution:
In this example the exemption limit for HRA can be calculated as:
Salary (5,000 × 12) = 60,000

DA (40% of 12,000) = 4800
Total Salary for computation of HRA = 64800

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