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In case the House Rent Allowance (H.R.A.) is provided then there will be a tax savings (Please refer Valuation sheet for details). The above mentioned savings is mainly because of themethods Income tax act and Rules employs for valuation of taxability of H.R.A and Rent Free Accommodations (R.F.A.). The main components are explained with the help of a table given below:
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House Rental allowance(Section 10(13A) of Income tax act, 1961 & Rule 2A of Income Tax rules, 1962)
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Rent Free accommodation(Rule 3(1) of Income Tax rules, 1962
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Salary for this purpose consists of following components:
o Basis Salary.
o Dearness Allowance (Only the DA which forms part of the salary).
o Percentage bases commission.
In this whole H.R.A received is taxable subject to the deduction of least of the following :
o H.R.A received
o 50% of salary
o Rent Paid – 10% of salary
Please note if the rent paid iszero, exemption will be zeroand whole HRA received will become taxable.
Taxability under this is dependent upon the following factors:
o H.R.A received
o Rent Paid by the employeefor hiring the accommodation out of HRA received.
o Salary Computed for this purpose.
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v Salary for this purpose consists of following components:
o Basis Salary.
o Dearness Allowance (Only the DA which forms part of the salary).
o All allowance to the extent taxable.
o Leave salary received during employment.
o Bonus (on receipt basis)
o Commission (both Percentage based as well as fixed commission)
v There is no separate exemption under this, least of the following is taxable (In case accommodation is hired by the employer) :
o Hire charges
OR
o 15% of Salary
Taxability under this is dependent upon the following factors:
o Hire charges paid for the accommodation by the employer.
o Salary computed for this purpose.
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Let us explain with the help of an example: Total outflow of the employer assumed to be INR 100/-
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House Rental Allowances
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RENT FREE accommodation
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Basis salary = INR 50/-HRA = INR 25/-
Other allowances = INR 25/-
Computation of Taxable HRA
HRA received = INR 25/-
Deduction will be least of the following:
o 50% of salary i.e. INR 25/-
o HRA received i.e. INR 25/-
o Rent Paid – 10% of salary i.e.
INR 25 – INR 5 = INR 20/-
(Please Refer Note-1)
The taxable HRA comes out to be INR 5/-
Income under the head salary = INR 80/-
Note: 1
Rent Paid also assumed to be INR 25/-.
In order to claim 100% deduction of the
HRA received, the employee needs to pay Rent to
the extent of HRA received plus 10% of salary.
This way the whole HRA received will be exempt.
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Basis salary = INR 50/-RFA(Hire charges paid) = INR 25/-
Other allowances = INR 25/-
Computation of Taxable RFA
Least of the following will be taxable:
o 15% of salary i.e. INR 11.25/-
OR
o Hire charges i.e. INR 25/-
The taxable RFA comes out to be INR 11.25/-
Income under the head salary = INR 86.25/-
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Let us explain the obsrevations arising from the above analysis with the help of a diagram –
total emulements of the employee in both the cases will be inr 100/-
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House Rental Allowances
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RENT FREE accommodation
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o In this case the Income taxable under the head salary comes out to be INR 80/-.
o In this case amount of income which will be avoided from being taxed, as compared to a case of other alternative in which it would have been taxed, will be to the extent of INR 6.25/-.
o There will be a tax savings to the extent of INR 1.875/-.
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o In this case the Income taxable under the head salary comes out to be INR 86.25/-.
o In this case additional income which will be taxed, as compared to a case of other alternative in which it would have been saved, will be to the extent of INR 6.25/-.
o In this case there will be additional tax implication to the extent of 1.875/-.
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