Sep 292014
 

House Rent Allowance (HRA) Vs. Rent Free Accommodations (RFA)

House Rent Allowance (H.R.A.) results in tax savings because accounting under Income tax act is direct exemption based. However, accounting of Rent Free accommodation is valuation based taxation and added to total income of employee presumptive basis.

The principles of valuations are explained below:-

House Rental allowance
(Section 10(13A) of Income tax act, 1961 &Rule 2A of Income Tax rules, 1962)

Rent Free accommodation
(Rule 3(1) of Income Tax rules, 1962

Components of salary:

  • Basis Salary.
  • Dearness Allowance (Only the DA which forms part of the salary).
  • Percentage bases commission.


Extent of taxation:-

Exemption based:- HRA is taxable if received more than least of the following :

  • H.R.A received
  • 50% of salary
  • Rent Paid – 10% of salary

Examples:-

  • If the rent paid is zero,exemption will be zero and whole HRA received will become taxable.

Conclusion:-

Taxability under this is dependent upon the following factors:

  • H.R.A received
  • Rent Paid by the employee for hiring the accommodation out of HRA received.
  • Salary Computed for this purpose.
Components of salary:

  • Basis Salary.
  • Dearness Allowance (Only the DA which forms part of the salary).
  • All allowance to the extent taxable.
  • Leave salary received during employment.
  • Bonus (on receipt basis)
  • Commission (both Percentage based as well as fixed commission)

Extent of taxation:-

No separate exemption under this,

Least of the following is taxable

(In case accommodation is hired by the employer) :

  • Hire chargesOR
  • 15% of Salary

Conclusion:-

Taxability under this is dependent upon the following factors:

  • Hire charges paid for the accommodation by the employer.
  • Salary computed for this purpose.

Now, above factors may help a good tax planning tool for the employees and CTC planning for employer. In the following examples we shall explain this. Total outflow of the employer assumed to be Rs. 100/-

House Rental Allowances

Rent Free Accommodation

Basis salary = Rs. 50/-
HRA = Rs. 25/-
Other allowances = Rs 25/-Computation of Taxable HRA

HRA received = Rs. 25/-

Deduction will be least of the following:

  • 50% of salary i.e. Rs. 25/-
  • HRA received i.e. Rs.  25/-
  • Rent Paid – 10% of salary i.e.

Rs. 25 – Rs. 5 = Rs. 20/-

The taxable HRA comes out to be Rs. 5/-

Income under the head salary = Rs. 80/-

Basis salary  = Rs. 50/-
RFA(Hire charges paid) = Rs. 25/-
Other allowances = Rs. 25/-Computation of Taxable RFA

No tangible receipts to employee.

Least of the following will be taxable:

  • 15% of salary i.e. Rs. 11.25/-

OR

  • Hire charges i.e. Rs.  25/-

The taxable RFA comes out to be Rs. 11.25/-

Income under the head salary = Rs. 86.25/-

Analysis and fund planning:-

Total CTC of the employee (or outflow of employer) in both the cases will be Rs. 100/-

House Rental Allowances

Rent Free accommodation

Income taxable under the head salary :Rs. 80/-.

  • Extra income that can be avoided from being taxed: Rs. 6.25/-.
  • So it’s a tax advantageous.
Income taxable under the head salary : Rs. 86.25/-.

  • Extra income that is taxed: Rs. 6.25/-.
  • So the taxes disadvantage.


By: Sensys Technologies

For more tools on tax planning and CTC planning please refer to our blogs on http://www.sensystechnologies.com/blog

For any further information or query you can be reached to experts of our panel at contact@sensysindia.com

Sep 162014
 

HOUSE RENT ALLOWANCE – How to compute exemption

What is House Rent Allowance?

-  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.
– Now a days HRA is given to all employees irrespective of actual rent factor. In most of the cases it is 40% to 50% of basic pay of or 28% (approx.) of CTC and so is the major tax planning factor.
– The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules.

How is HRA accounted for in the case of a salaried individual and a self-employed professional?

Basis  Salaried individual Self-employed professional
Tax accounting Under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. Under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.

What is the formula for calculating HRA exemption?

Minimum of the following three options:

  1. Actual house rent allowance received from your employer
  2. Actual house rent paid by you minus 10% of your basic salary
  3. 50% of your basic salary if you live in a metro or 40% of your basic salary if you live in a non-metro

This minimum of above is  allowed as income tax exemption on house rent allowance.

Salary here means basic salary which  includes dearness allowance if the terms of employment provide for it, and commission based on a fixed percentage of turnover achieved by the employee. All the components shall be taken on due basis. Caution: salary is taxable on due or receipt whichever is earlier (sec 15) but for calculating HRA exemption all components shall be taken only on due basis.  

Caution: 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.

Examples for calculation of exemption/deduction of HRA

X has received following amount during the previous year.

  1. Basic Salary – Rs. (5000*12) – Rs. 60,000/-
  2. Dearness Allowance (D.A) – Rs. (1000*12) – Rs. 12000/-
  3. House Rent Allowance (H.R.A.) – Rs. (2000*12) – Rs. 24000/-
  4. Actual Rent Paid – Rs.(2000*12) – Rs. 24000/-

Calculation

The minimum of the following amount shall be exempt

  • Actual HRA received (2000*12) – Rs. 24000/-
  • Rent Paid in excess of 10% of salary ( 24000-7200) – Rs. 16800
  • 40% of Salary – Rs. 28800/-

Therefore, Rs. 16800 shall be exempt and the balance Rs. 7200 shall be included in gross salary.

Nov 192012
 

House Rent Allowance

Income tax department offers HRA tax exemption for those individual tax payer who stays in a rented house. Section 10(13A) of the income tax act allows the exemption of HRA. Employee can claim for HRA exemption if he or she lives in a rented house. To be eligible for claim of HRA deduction, an employee must be paying for the rent to his landlord and maintain the receipts which state that he has been paying for his rental expenditure. If an employee stays in his own house there is no tax deduction on HRA.

Following points to be considered for Calculation of HRA exemption.

1. Amount equal to 50 percent of Salary where residential house is situated in Mumbai, Delhi, Kolkatta or Chennai or Amount equal to 40 percent of Salary for other places.

2. House Rent Allowance received by the Employee

3.  Excess of Rent paid over 10% of Salary.

Salary includes Basic Salary + Dearness Allowance + Commission on fixed percentage of turnover achieved by an Employee.

Minimum of point no. 1, 2 & 3  is exempted.

For Example,

Basic Salary (Rs 5000/- per month —— Rs. 60, 000/- yearly),
Dearness Allowance (Rs. 1000/- per month —- Rs. 12, 000/- yearly).
Actual Rent Paid (Rs 2000/- per month —— Rs 24000/- yearly),
HRA received by Employee (Rs. 2000/- per month —- Rs. 24, 000/- yearly)
City: Mumbai

1.  50% of  Salary (Basic + DA) = Rs. 36,000/-

2. Rent Received = Rs. 24,000/-

3. Rent paid in excess of 10% of Salary (Basic + DA) =  Rs. 16, 800/-,

Hence, Rs. 16800/- would be exempt and the rest Rs 7,200/- would be included in gross salary for tax calculation.

Documents needed to claim HRA includes rent receipts, rental agreement, PAN details of the landlord.