Tax Treatment of House Rent Allowance According to Section 10(13A)

House Rent Allowance

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.

House Rent Allowance

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

House Rent Allowance

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.

Related Post

image

Major Updates: New Direct Tax Code 2025 Simplifies Income Tax

Simplifying India’s Tax Landscape: Key Changes Proposed in the Direct Tax Code 2025 Have you ever found Income Tax complex, with confusing exemptions and deductions? To make taxation more user-friendly and…
image

Tax Planning for Middle-Class Salaried Employees

Tax Planning for Middle-Class Salaried Employees For middle-class salaried employees, tax planning can significantly improve post-tax earnings and long-term wealth. Although salaried individuals have fewer avenues to reduce taxable income…
image

Understanding GST Audit: What Every Business Needs to Know

Understanding GST Audit: What Every Business Needs to Know Navigating the world of GST (Goods and Services Tax) audits can be challenging for many businesses. GST audits are essential to ensure compliance…

Book A One To One Consultation Now
For FREE

How can we help? *