ALL ABOUT HOUSE RENT ALLOWANCE(HRA) EXEMPTION CALCULATION

HRA or the House Rent Allowance is an amount paid by employers to employees as a part of their salaries. It provides employees with tax bene...

HRA or the House Rent Allowance is an amount paid by employers to employees as a part of their salaries. It provides employees with tax benefits for what they pay towards accommodations every year. The decision of how much HRA needs to be paid to the employee is made by the employer based on certain criteria like the salary and the city of residence. In Govt sector,HRA is part of Salary package for all the employees.

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• House Rent Allowance Exemption Calculation  posted by CA Gourav Jashnani 

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• How to Calculation House Rent Exemption u/s 10(13A) 

As per Income Tax Act Section 10(13A) exemption of House rent allowance from taxable income has been allowed and HRA exemption calculation is dependent on Four variable.

• House Rent allowance Received
• House Rent paid
• Salary received during the period
• Location of the house.

According to Section 10(13A) of Income Tax Act Rule 2A of the Rules, the quantum of exemption allowable on account of grant of special allowance to meet expenditure on payment of rent shall be the least of the following:

1. The actual amount of such allowance received by the assessee in respect of the relevant period i. e. the period during which the accommodation was occupied by the assesse during the financial year; or
2. The actual expenditure incurred in payment of rent in excess of 1/10 of the salary due for the relevant period; or
3. Third is 
• Where such accommodation is situated in Bombay, Calcutta, Delhi or Madras, 50% of the salary due to the employee for the relevant period; or
• Where such accommodation is situated in any other places, 40% of the salary due to the employee for the relevant period

For this purpose, "Salary" includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.Plus Fixed % commission on sales (if any)

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• Example : How  To Calculate 

Mr. Amit (place of posting Bhatinda) has provided following information regarding his salary 

• Basic salary 2,52,000 
• Dearness allowance forming part of salary while computing all retirement benefits 2,48,000 Commission (Rs. 5,000 per month) 60,000 
• House rent allowance (Rs. 10,000 per month) 1,20,000 
• Other allowance (fully taxable) 40,000 
• Value of perquisites provided by the employer 1,00,000 

He has taken a residential accommodation on rent at a monthly rent of Rs. 12,000. From the above information compute the amount of taxable house rent allowance if Mr. Amit.

Exemption in respect of house rent allowance will be lower of the following : 

1. Actual amount of HRA received by the employee for the year Rs. 1,20,000. 
2. Rent paid in excess of 10% of salary. This will amount to Rs. 94,000 (See note 2).
3. 40% of salary since residential house is situated at Bhatinda, this will come to Rs. 2,00,000 (See note 1). 

Least of the above Three is Rs 94000 hence exempted from Income Tax.

Annual HRA                                                                                1,20,000 

Less: Exemption in respect of HRA as computed above             (94,000) 

Taxable HRA                                                                                 26,000 

Note 1: Salary for the purpose of computation of exemption in respect of house rent allowance will come to Rs. 5,00,000 per annum (Rs. 2,52,000 basic salary and Rs. 2,48,000 dearness allowance). 40% of salary will come to Rs. 2,00,000. 

Note 2: Rent paid in excess of 10% of salary will be computed as follows : Annual rent (Rs. 12,000 × 12) 1,44,000 Less : 10% of annual salary of Rs. 5,00,000 (50,000) Rent in excess of 10% of salary 94,000
Online HRA exemption Calculator(may not work in moble)

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• PAN of the Landlord is Mandatory is rent paid is more than One Lakh 

An employee who is claiming House rent exemption (HRA) and annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is mandatory for the employee to report PAN of the landlord to the employer.This is big problem for many employees as landlord generally reluctant to provide PAN on rent receipt  or otherwise to tenant.

Abstract of the relevant provisions from circular 1/2017 dated 2.1.17 is reproduced hereunder. 

If annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is mandatory for the employee to report PAN of the landlord to the employer. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.

As given above, circular specified that in case the landlord does not have a pan , employee can give a declaration to this effect along with name and address of the landlord to his/her employer.

So all employees /employers /DDO(drawing and disbursing officer) should note down this requirement  and make sure the compliance of it while finalising the calculation and deduction of tax on payment of salary.

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• To claim the House rent exemption other points should also kept in mind

1. Under section 10(13A) of the Act, any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee is exempt from Income-tax to the extent as may be prescribed, having regard to the area or place in which such accommodation is situated and other relevant considerations.(read above how to calculate HRA exemption)
2. It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee subject to the limits laid down in Rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. 
3. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the House Rent Allowance or any portion thereof from the total income of the employee.
4. Though incurring actual expenditure on payment of rent is a pre-requisite for claiming deduction under section 10(13A), it has been decided as an administrative measure that salaried employees drawing house rent allowance upto Rs.3000/- per month will be exempted from production of rent receipt. It may, however, be noted that this concession is only for the purpose of tax-deduction at source, and, in the regular assessment of the employee, the Assessing Officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that the employee has incurred actual expenditure on payment of rent.

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• How to submit Claim for HRA exemption to Employer :Form 12BB

Employees claiming tax deduction and exemption on house rent allowance, leave travel assistance, housing loan interest payments and others on their income tax payments will now have to fill up Form 12BB with documentary proofs of investments in a specified format to avail the benefits.

Employees have already been submitting the documents as and when required in order to decide the tax deductible at source (TDS). However, Form 12BB gives details about the format in which the document needs to be filled and submitted.

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• FAQ on Calculation of House Rent allowance Exemption calculation 

1 :I have been taken a House loan and my house is under construction.I am paying 12000 as EMI. Can I take HRA exemption?

Ans:You can Claim Hra Benefit till your house completed subject to that you have actually paid the Rent .Further in future also, you can continue to claim HRA benefit ,if your house is at a location, other than where you are employed or you will give house for a rent .

2. I have received salary arrears of last years.For HRA exemption arrears is to be included or not?

Ans : For HRA exemption ,salary of the relevant period for which we are calculating exemption is to be taken .so arrears are not be included for HRA purposes .salary on due basis is to be taken.

3. As per Sixth Pay commission ,Grade pay has been added in Basic Pay ,whether it is part of salary for Calculation of HRA exemption ?

Ans: as per sixth pay commission

Basic pay = Pay in pay band plus grade pay

so according to 6th cpc grade pay is part of basic pay .and basic pay you are referring is actually pay in pay band .in brief grade pay is to be included for salary as per HRA exemption calculation.

4. I am a doctor and receiving NPA (non practice allowance) ,and it is also considered in most of the retirement benefits .Is NPA to be included in salary for HRA exemption ?

Ans.No ,it is not.As per section 10(13A) ,only DA is to be included in the salary for HRA exemption calculation.

5.To claim HRA exemption ,my DDO is asking for Rent payment receipt from my landlord .what should I do?

Ans: Give him ,what he asking for .yes produce the house rent payment receipt to him.Actually DDO(drawing and disbursing officer) is responsible to deduct TDS from salary ,so to avoid penalties at later stage ,he has to verify all the saving proofs ,rent receipt etc from the employee.and if employee is unable to produce the same then DDO is empowered to reject the claim of the employee.

6.Is it necessary to Give Landlord's Pan number on rent receipt ?

Ans::Update :Landlord's Pan mandatory for payment exceed more than Rs 1,00,000 per annum wef financial year 2013-14

Landlord pan is mandatory if rent paid iss in excess of Rs 180000/- read more here(Fy 2011-12 & 12-13)

7. My friend have informed me that there is a cut off amount for rent paid after which only,rent receipt is required.Is it true?

Ans: Yes and No .Yes because there is a cut off Limit .No because the cut off limit is for HRA received per month and not for House rent paid.Those employees ,who are receiving house rent up to 3000 per month are not required to submit Rent receipt to DDO.I repeat this 3000/- limit is for house rent received and House rent paid in this case may be more than 3000/-.

8. I have produce rent receipt to my DDO but he his now asking for rent agreement ?

Ans: Rent receipt is enough to claim the HRA exemption ,and I request to your DDO, please do not ask for rent agreement . (jane bhi do yaar ,main bhi DDO hoon ,koi jarroorat nahin hain rent agreement ki ,rent receipt de to di aap ko ).On the reverse ,if employee has submitted a rent agreement only then DDO should ask for rent receipt as the rent agreement is not a proof of payment.

9.My DDO /employer has rejected my HRA exemption and deducted the tax accordingly.Further nothing has been mentioned about HRA exemption in Form 16 issued by the employer .Can I claim HRA exemption while filing my Income tax return?

Ans:yes ,you can .If employer has not considered your HRA exemption claim then you can claim the same while filing your income tax return even nothing has been mentioned about HRA/HRA exemption in Form 16.

10.I have paid rent to my wife/Father .Can I claim HRA exemption?

Ans: if this is actual payment then yes you can claim rent exemption even if the rent is being paid to your family members .But remember House must be on their name or he/she must be authorise to receive rent on the property.Though the above point have no relation with HRA exemption but tax planning should be done carefully and remain with in limit .

11.Both of us (husband /wife) are working and living in same house on rent .we both want HRA exemption .it it in order?

Ans: yes ,you can.But subject to that rent is shared/paid by both of you and individually,both of you can claim exemption up to share of rent paid actually paid by you.

12.I am claiming HRA for three months and moving to own residence after that. When the HRA is calculated, will it take into consideration the basic for three months or basic pay for entire year? i.e., will the calculation be = Actual rent - 10% of annual basic or Actual rent - 10% of three month basic ?

Ans:calculate salary & House rent paid month to month basis and then calculate full year year exemption by aggregating all month in your case exercise is required to be done for three months only.

13. Can i get HRA exemption and interest of House loan and principal amount both the amounts, if i am not staying in my own house because it is in other city

Ans :Yes ,You can claim both HRA & House loan interest if you are staying at other place due to employment

read details in the link

14.I am paying rent for house at delhi where my family is living and also paying rent for accommodation in another city where i am employed. can i claim HRA exemption for total rent paid by me for both the accommodation?

Ans . As per rule 2A ,rent paid is to be considered for only one house in which assessee is residing and paying the rent .so you can claim rent for only where you are residing ,not on house in which family is living

15: what if i have a house in my name ,and another house joined to my house in mother name .Can I get hra benefit if i pay rent to my mother ?

Ans:You can claim HRA only if you have actually paid it ,in this case also ,i you have paid rent to your mother ,then you can claim HRA exemption benefit. Further if you show House rent payment and claim HRA exemption then your own house will be deemed to be let out and you have to add rent in your income for that house.so on one side your income will be reduced by HRA exemption ,on the other side you have pay tax on deemed rent for house owned by you.Overall no benefit in doing this.

16.How to calculate HRA exemption ,monthly or yearly?

Ans: HRA exemption calculation is depended on four variable as shown above,if all of these remains same in a year then you can calculate it on yearly basis otherwise for each set of of variable ,you have to do separate calculation .suppose DA is changed then you have to calculate separate calculation. Different methods has been explained as under.

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• Different Method of Calculation of HRA exemption adopted by Employer 

Organizations in India follow different methods for arriving at the House Rent Allowance (HRA) exemption, while calculating income tax on employee salary. Each method produces a different exemption amount. This begs the question, “which is the correct method?” Payroll managers have different opinions on how the exemption should be calculated. Let us examine the methods used for the HRA exemption calculation, and see which method goes well with the letters and spirit of Section 10(13A) of the Income Tax Act, 1961.

HRA CALCULATOR (EXEMPTION -HOW TO CALCULATE)

As per the Indian income tax law, the HRA exemption should be calculated as the least of the following.

• Rent paid in excess of 10% of basic salary.
• Actual HRA received by the employee.
• Forty percent of basic salary, if the location of the residence is in a non-metro city/town or 50% of basic salary, if the location of the residence is in a metro city

From the above “least of three” rule, it is clear that HRA exemption amount is determined by a number of factors — Basic pay, location of the residence, rent paid by the employee, and the HRA paid to the employee.

So far, so good. The “least of three” rule looks easy to understand and implement. However, the same rule can be applied in different ways to create different methods of HRA exemption calculation.

Let us assume that an employee, who lives in a metro city, takes home a monthly Basic pay of Rs 50,000, monthly HRA of Rs 25,000, and pays a monthly rent of Rs 25,000. As long as everything remains constant throughout the year, there is no complication. The problem starts once any of the factors changes. Let us assume that the employee has a loss of pay for a month and half, say from August 1 to September 15, but the employee pays full rent in the months of August and September. Let us look at the different methods of calculating the exemption.

Method 1 – Annualized HRA exemption calculation

Organizations using this method calculate HRA exemption by determining the values of the different factors (Basic pay etc.) for the year and applying the “least of three” rule.

• a. Basic pay for the year = Rs 50,000 x 10.5 months (on account of loss of pay) = Rs 525,000.
• b. HRA paid to the employee = Rs 25,000 x 10.5 months (on account of loss of pay) = Rs 262,500.
• c. Rent paid by the employee for the year = Rs 25,000 x 12 = Rs 300,000.

HRA exemption calculation

• 1. Rent paid in excess of 10% of Basic salary = Rs 300,000 – Rs 52,500 = Rs 247,500.
• 2. Actual HRA received by the employee = Rs 262,500.
• 3. Fifty percent of Basic salary (since the location of the residence is in a metro city) = Rs 262,500.

The HRA exemption for the year is the least of the above, which is Rs 247,500.

Method 2 – Monthly HRA exemption calculation

Organizations using this method calculate HRA exemption each month, and add the monthly HRA exemption values to arrive at the exemption for the year.

Monthly HRA exemption amount — after applying the “least of three” rule for each month — from

• April to July and from October to March = Rs 20,000 per month.
• Monthly HRA exemption amount — after applying the “least of three” rule — for August = Rs 0.
• Monthly HRA exemption amount — after applying the “least of three” rule — for September = Rs 12,500.

The total of HRA exemption amounts across all months = Rs 212,500 for the year.

Method 3 – HRA exemption calculation for each period of input change

As per this logic, whenever any of the input parameters (Basic pay, Rent paid, HRA, and Metro or Non-metro) changes for an employee during a year, the HRA exemption is calculated. In other words, the year is divided into as many periods as dictated by changes in any of the input parameters, and HRA exemption is calculated for each of the periods. Finally, the HRA exemption amounts for the different periods are aggregated to arrive at the HRA exemption amount for the year.

With regard to the illustration presented earlier, the year is divided into 3 periods, as follows.

• Period 1: From April 1 to July 31 – when there is no change to any of the input factors.
• Period 2: From August 1 to September 15 – when Basic pay and HRA change (became zero) on account of loss of pay.
• Period 3: From September 16 to March 31 – when there is no change to any of the input factors.

HRA exemption calculation

• HRA exemption for period 1– from April 1 to July 31 = Rs 80,000.
• HRA exemption for period 2 — from August 1 to September 15 = Rs 0.
• HRA exemption for period 3 — from September 16 to March 31 = Rs 130,000.

The total of HRA exemption amounts across all periods = Rs 210,000 for the year.

The 3 methods yield different annual HRA exemption amounts – Rs 247,500, Rs 212,500, and Rs 210,000.

Which HRA exemption method is the correct method?

This is an important question to answer. Depending on the method an organization uses, the tax liability for the employee would be higher or lower, and in turn the government’s receipt from tax on salary income would be higher or lower.

The above illustrations present HRA exemption calculation in the event of changes in Basic salary and/or HRA. In the event of Basic salary or HRA not changing, but the rent amount changing or the location of the residence changing (say, from metro to non-metro), there will still be differences in HRA exemption calculation across the 3 methods.

While there is no explicit instruction from the income tax department as to which method should be used, we believe the “period” method (Method 3, described above) goes well with the provisions of Section 10(13A) of the Income Tax Act.

Why many organizations do not follow the Period method?

1. Ignorance: Many payroll managers do not seem to be aware of the limitations of the other methods. The income tax department too does not seem to have given any specific instructions on how the exemption should be calculated. The manner in which HRA exemption is calculated in many organizations in India does not exactly fall in line with the Income Tax Act.

2. Limitations in payroll software: The Period method is not easy to implement. Whenever Basic salary, HRA, place of residence, and rent paid change, the HRA exemption has to be computed. Manual computation of HRA exemption for each period is cumbersome and prone to errors. We do not know of too many payroll software (other than Tandem’s HRWorks) in India which can automatically compute HRA exemption whenever any of the input parameters that drive the HRA exemption calculation, change.

We wonder which is worse: cumbersome law or incorrect practice of cumbersome law?

Maybe it is time for a total re-think on the need for HRA exemption itself. Even if the HRA exemption has to exist, the income tax department should provide specific instructions (with clear-cut examples) on how the exemption should be calculated.

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• Deduction of House Rent Paid To Salaried employee not receiving the HRA and Non salaried Employee

Detail of deduction for house rent under section 80GG .

Deduction under section 80GG for house rent paid:Deduction u/s 80GG is available if following condition are satisfied

• Deduction is available to Individual Assessee only.
• He has not received HRA(house rent allowance ) from his employer if he is a salaried person otherwise he should be self employed.
• He has paid house rent for his own residence.
• He or his spouse or his minor child or HUF(of which he has a member) should not have a residential house where he ordinarily resides or performs duties of his office or employment or carries on his business or profession;
• He should not have a house owned by him, which is under his occupation and value of that is not being taken as nil under section 23(2)(a) or 23(4).
• A declaration on Form 10BA should be submitted .

So if conditions are satisfied then you can claim deduction u/s 80GG for house rent paid

Amount of deduction:Least of the following is deductible u/s 80GG

• Rs 5000 per month wef 01.04.2016 (2000 per month up to 31.03.2016).
• 25 % of total income
• the excess of actual rent paid over 10 % of total income

Total Income means income excluding long term and short term gain under section 111A and income referred to in section 115A or 115D but before making any deduction under section 80C to 80U.

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• Relevant Section and Rules of the income tax is reproduced hereunder

Section 10(13A) any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant considerations

Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—

• (a) the residential accommodation occupied by the assessee is owned by him ; or
• (b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him

Rule 2A as per Income Tax Rules(Limits for the purposes of section 10(13A)).

2A. The amount which is not to be included in the total income of an assessee in respect of the special allowance referred to in clause (13A) of section 10 shall be

• (a) the actual amount of such allowance received by the assessee in respect of the relevant period; or
• (b) the amount by which the expenditure actually incurred by the assessee in payment of rent in respect of residential accommodation occupied by him exceeds one-tenth of the amount of salary due to the assessee in respect of the relevant period; or
• (c) an amount equal to
• (i) where such accommodation is situate at Bombay, Calcutta, Delhi or Madras, one-half of the amount of salary due to the assessee in respect of the relevant period; and
• (ii) where such accommodation is situate at any other place, two-fifth of the amount of salary due to the assessee in respect of the relevant period,
• (d) [***]

whichever is the least.

Explanation : In this rule

• (i) salary shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule;
• (ii) relevant period means the period during which the said accommodation was occupied by the assessee during the previous year.
• (iii) [***]