Q.1. What is HRA? 

HRA i.e. House Rent allowance is a common form of allowance employees receive. Taxation of HRA requires certain clarifications which generally people are looking for but do not get correct answers.

Q.2. What is the exemption available under Income tax act in relation to HRA? 

A part of HRA is exempted u/s 10(13A) of Income Tax Act, 1961.

The amount of exemption is taken to be the least of following three amounts:

  1. Amount of HRA received.
  2. Excess of Rent paid over 10% of Salary
  3. 50% of Salary, in case the employee resides in metro cities. otherwise 40% of salary

Q.3.  What is meant by Salary for the purpose of HRA?

Salary means Basic Salary + Dearness Allowance + Commission which is based on turnover acheived.

Q.4. If i stay in my own house and pay rent for some other house, is the rent paid considered for exemption?

The one and only important condition is that you should pay rent for the house in which you live. Such rent is only considered for exemption purpose. If you are staying in a house for which no rent is paid or payable, then HRA exemption is not available for you.

 Q.5. I worked for 8 months, but I paid rent for 12 months. what is your view about HRA exemption?

If you worked for 8 months, the next question is for how many months, did you receive HRA? If you received HRA for 8 months, then those 8 months’ rent expenditure is only taken for calculation of exemption purpose. Other months – No.

Q.6. My employer is asking proof for Rent payment. What should i do as per law?

As per Rule 2A, an employee who is getting House Rent Allowance of Rs.3000/- p.m. or lesser need not submit any sort of rent receipt to their employer. However, IT department can ask for such proof, in case they want. Otherwise, employer cannot ask for the proof upto Rs.3000/-

Those having house rent allowance of more than Rs.3000/- p.m. should definitely submit rent receipts to their employer for the employer to estimate your tax liability correctly.

Q.7. I want to do HRA planning in my Salary Structure. i.e. I want to know, How much HRA should i receive from the company to best utilize the exemption? Please advice.

First tell me, what is your rental expenditure p.a. as a percentage of salary

a) Rent as a percentage of Salary: say x%

b) Reduce x by 10, so you have (x-10)%

c) Your HRA as a component in salary structure should be (x-10)% or 50% whichever is lower.

Q.8. I want to do HRA planning by finding out how much rent should I pay to get the maximum benefit? Please advice.

This means that your HRA is fixed but you want to know what amount of rent can get maximum benefit to you.

If your HRA is 50% of salary or more, then your rent can be 60% of salary.

If your HRA is less than 50% of salary, then your rent can be (HRA as a percentage of Salary + 10)%

Please note: This is Tax Planning not Tax avoidance. This is one of my researched tax planning option… so enjoy!