TAX: Kuldip Kumar

I want to know how the house rent allowance (HRA) is computed and taxed?
Section 10(13A) of the Income Tax Act, 1961 (the Act) read with Rule 2A of the Income Tax Rules, 1962 (Rules) provide for an exemption of HRA to the extent of the least of the following :

Actual HRA received Excess of the rent paid over 10 per cent of the salary, or 40 per cent of the salary (50 per cent of the salary if the house is situated in Delhi, Mumbai, Chennai or Kolkata).

Salary for this purpose includes basic salary and dearness allowance (DA) under the terms of employment and commission is based on fixed turnover.

Where the employer provides accommodation, the value of perquisite is the licensed fee as determined by the government in case of the government being the employer. For other employers, if the employer owns the accommodation, the perquisite is calculated at 15 per cent /10 per cent/ 7.5 per cent, depending on the population of the city where accommodation is provided. However, where the accommodation is taken on lease/ rent by the employer, the perquisite is calculated at 15 per cent of the salary or the actual rent paid by the employer, whichever is lower.

Salary includes pay, taxable allowances, commission, any monetary payments, but excludes value of perquisites, DA unless it forms part of the salary while calculating retiral benefits, employer’s contribution to provident fund, retiral benefits and severance pay.

In both the cases — government or non-government employer — any recovery of rent from the employee is reduced from the value of perquisite as determined above.

Which option is better for an individual would depend on the case-to-case basis and also on factors such salary level, rent paid, etc. In the following table, we have compared the different scenarios where the individual salary package is Rs 18 lakh per annum.

Option 1 : The employee is getting HRA, but stays in his own house and does not pay any rent.

Option 2 : The employee is getting HRA and pays Rs 40,000 rent per month from his own pocket.

Option 3 : The employee is provided with rented accommodation and the employer directly pays a rent of Rs 50,000 per month to the landlord.

The writer is executive director of PricewaterhouseCoopers. Send your queries at yourmoney@bsmail.in