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Tax Treatment of House Rent Allowance According to Section 10(13A)
In order to minimize their tax obligations, employees commonly seek or employers offer a breakdown of their salary, which permits them to avail exemptions when computing their earnings categorized as salary. The Income Tax Act offers numerous allowances for this objective, with House Rent Allowance (HRA) being one of them. HRA empowers taxpayers to lower their taxable income.
House Rent Allowance
An employee may be eligible for a house rent allowance, which is a unique sum of money given by their employer to help with housing expenses.
Taxability of House Rent Allowance u/s 10(13A) of Income Tax Act 1961
The Income Tax Act’s Section 10(13A) exempts the lowest of the following amounts:
i. House rent allowance actually received.
ii. Rent paid minus 10% of the salary.
iii. 50% or 40% of the salary, depending on the employee’s place of residence.
Notes
i. Base pay, dearness allowance (if included in retirement benefits), and a commission on turnover based on a percentage are all included in the compensation.
ii. There is no exception permitted if an employee lives in their own home or does not pay rent.
iii. When determining the exemption for HRA, 50% of the pay is taken into account for workers who live in metropolitan areas (Delhi, Mumbai, Chennai, and Kolkata); 40% of the salary is utilized in other cases.
Example
Question:
Mr. A’s employer pays him a monthly HRA of 8,000. His monthly compensation consists of 35,000 for his basic salary, 7,000 for his dearness allowance (of which 20% is included in retirement benefits), and 3,000 for his commission. Determine how much of Mr. A’s HRA is taxed if he pays his landlord 10,000 a month in rent and lives in Delhi.
Solution:
Total taxable HRA in Mr. A’s possession: Under Section 10(13A), the least of the following sums is exempt:
i. HRA received (8,000 * 12) = 96,000
ii. Rent paid – 10% of salary (10,000 * 12 – 10% of (35,000 + 20% of 7,000) * 12) = 76,320
iii. 50% of salary (50% of (35,000 + 20% of 7,000) * 12) = 2,18,400 Exempt amount = 76,320 Taxable amount of HRA in the hands of Mr. A = 96,000 – 76,320 = 19,680
Since the commission is not dependent on turnover %, it is not taken into account when determining salaries. Since DA is included in retirement benefits, only 20% of it is considered. Given that Mr. A resides in the metropolitan metropolis of Delhi, 50% of his salary is taken into account while calculating his exemption.
In the event that the address is not given, it is assumed to be a large metropolis.
It is imperative for employers and employees to comprehend the taxability of House Rent Allowance as per Section 10(13A) of the Income Tax Act. Ensuring compliance with tax legislation requires accurate calculation and documentation. The taxable HRA for Mr. A in this instance was determined to be 19,680.
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