Example of House Rent Allowance (HRA) Exemption Calculation


Example of House Rent Allowance (HRA) Exemption Calculation

Example of House Rent Allowance (HRA) Exemption Calculation

Example:

Calculate the available exemption of HRA from the following details: (Monthly)
Basic Pay                                                                             :  Rs.40,000
Dearness Allowance                                                      :  Rs.5,000
Entertainment Allowance                                            :  Rs.1,500
House Rent Allowance                                                 :  Rs. 10,000
Rent per Month                                                               :  Rs. 12,000
Place of Accommodation                                           :  Non-Metro
Place of Work                                                                  :  Metro

Solution:
For the purpose of calculating HRA, least of the following is considered:
1.       Actual HRA Received                                                                   Rs.10,000
2.       Actual Rent Paid Less 10% of Basic Salary  (Note 1)          Rs. 7,500
3.       40% of the Basic Salary (Note 2)                                                  Rs.18,000
Thus Rs.7,500 will be available as an Exemption under section 10(13A) and remaining Rs. 2,500 (10,000-7,500) will be taxable.
:: Working Notes ::
Note 1: Calculation of Actual Rent Paid Less 10% of Basic Salary
Actual Rent paid                                            Rs.12,000
  Less:   10% of Basic Salary*                                    Rs. 4,500
                                                                                            Rs. 7,500
*Basic Salary =  Basic Pay + Dearness Allowance = Rs.40,000 + Rs.5,000 = 45000
  10% of Basic Salary = Rs 45,000 * 10% = Rs. 4,500.
(Here Entertainment allowance is not to be considered as other allowances and perquisites are not to be considered).
Note 2: Calculation of 40% of Basic Salary
(*) Basic Salary as calculated above – 40% (Non -Metro) = 45000 * 40% = Rs, 18,000.
(Here the point to be kept in mind is 40% of the Basic Salary is to be considered as the accommodation is in a non – metro. If the accommodation would be in metro, 50% of the Basic salary would have been taken into consideration)
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Extension of Example:
Calculate HRA for a whole year with the above figures and certain changes as follows:
–  Dearness Allowance does not form part of salary as provided in terms of employment
– The employee actually resided at the rented accommodation from June to March and in a rent free accommodation during April and May. The employer started to pay HRA when the employee started to reside in rented accommodation.
– Rent Actually paid is Rs. 10,000 per month for the months from June to December and Rs.12,000 per month from January to March.
Solution:

In the above case calculation is to be made by dividing the different parts of a year when there is change in any parameter i.e. basic pay, actual rent paid, actual HRA received, etc.
 Ø  For April and May:
No exemption will be availed for the Months of April & May as there is no any Rent paid by the Employee as well as there is no any HRA received.

 Ø  For the months from June to December:
Least of the following is considered:
1.       Actual HRA Received (Rs.10,000 * 7)                                                              Rs.  70,000

2.       Actual Rent Paid Less 10% of Basic Salary     (Note 1)                        Rs.  42,000
3.       40% of the Basic Salary (Note 2)                                                                      Rs.1,12,000
Thus Rs.42,000 will be available as an Exemption under section 10(13A)for the respective period.
:: Working Notes ::
Note 1: Calculation of Actual Rent Paid Less 10% of Basic Salary
 Actual Rent paid (Rs. 10,000*7)                                  Rs.70,000
  Less:   10% of Basic Salary [(Rs. 40,000*7)*10%]                 Rs. 28,000
                                                                                                                     Rs. 42,000
(Here Entertainment allowance is not to be considered as other allowances and perquisites are not to be considered and dearness allowance is also not to be considered as it is not a part of basic salary as per employment terms).

Note 2: Calculation of 40% of Basic Salary
Basic Salary as calculated above – 40% (Non-Metro) = (40000*7) * 40% = Rs. 1,12,000.

 Ø  For the months from January to March:
Least of the following is considered:
1.       Actual HRA Received (Rs.10,000 * 3)                                                        Rs.30,000
2.       Actual Rent Paid Less 10% of Basic Salary     (Note 1)                     Rs.24,000
3.       40% of the Basic Salary (Note 2)                                                                Rs.48,000
Thus Rs.24,000 will be available as an Exemption under section 10(13A) for the respective period.
:: Working Notes ::
Note 1: Calculation of Actual Rent Paid Less 10% of Basic Salary
 Actual Rent paid (Rs. 12,000*3)                                   Rs. 36,000
  Less:   10% of Basic Salary [(Rs. 40,000*3)*10%]                  Rs. 12,000
                                                                                                                      Rs. 24,000
(Here Entertainment allowance is not to be considered as other allowances and perquisites are not to be considered and dearness allowance is also not to be considered as it is not a part of basic salary as per employment terms).

Note 2: Calculation of 40% of Basic Salary
Basic Salary as calculated above – 40% (Non-Metro) = (40000*3) * 40% = Rs. 48,000.

 Ø  Total HRAExemption for the Year:
Total HRA Received for the Year                                   : Rs.1,00,000
           (Rs.10,000*10 Months)
Exemption available:
April & May                                                  : NIL
June to December                                   : Rs. 42,000
January to March                                    : Rs. 24,000
Total                                                 : Rs. 66,000
Taxable HRA to be included in Salary                              : Rs.34,000
        (Rs. 1,00,000-Rs,66,000)
 §  Conclusion:

From the above calculation it can be concluded that the least HRA will be Actual Rent paid less 10% of Basic Salary in normal situation. But the same will change in the special case where the Actual Rent paid is very high as compared to the actual HRA received.

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