Tax deduction on HRA

Employees generally receive a house rent allowance (HRA) from their employers. This is a part of the salary package. HRA is given to meet the cost of a rented house taken by the employee for his or her stay.

The Income Tax Act allows for deduction in respect of the HRA paid to employees . 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.



In order to claim the deduction, the rented premises must not be owned by the employee. In case one stays in an own house, the entire amount of HRA received is subject to tax. 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% of the salary due to the assessee in the period.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% of salary i.e., Rs 1.5 lakhs less Rs 50,000 (10% of salary) = Rs 1 lakh



40% of salary (40% 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      SOURCE;ET