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Ramakant Sharma
Ink Innovator
Asked: 2024-03-14T09:59:06+05:30 In:

What are the provisions for calculating House rent allowance?

What guidelines apply to the computation of the house rent allowance?

BCOC–136IGNOU
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    1. Power Elite Author

      Calculation of House Rent Allowance (HRA):

      House Rent Allowance (HRA) is a component of salary provided by employers to employees to meet their rental expenses for accommodation. The provisions for calculating HRA are governed by the Income Tax Act, and certain conditions must be met for employees to claim HRA exemption.

      1. Actual HRA Received: The actual amount of HRA received by the employee from the employer is considered for calculation.

      2. Salary: For the purpose of calculating HRA, salary includes basic salary, dearness allowance (if it forms part of retirement benefits), and commission based on a fixed percentage of turnover achieved by the employee.

      3. Rent Paid: The actual rent paid by the employee for the accommodation in which they reside is considered for calculation. It is important to note that the rent paid must exceed 10% of the salary to be eligible for HRA exemption.

      4. Location of Residence: The HRA exemption is based on the location of the rented accommodation. It is categorized into three categories – metro cities, non-metro cities with a population exceeding 10 lakhs, and other areas.

      5. HRA Exemption Calculation: The least of the following amounts is exempt from tax:

      • Actual HRA received.
      • 50% of the salary for employees residing in metro cities or 40% for employees in non-metro cities.
      • Rent paid minus 10% of the salary.

      6. Example:

      • If an employee receives an HRA of ₹20,000 per month, pays rent of ₹15,000 per month, and has a basic salary of ₹50,000 per month, the exemption amount would be calculated as follows:
        • Actual HRA received: ₹20,000
        • 50% of salary (metro city): ₹25,000 (50% of ₹50,000)
        • Rent paid – 10% of salary: ₹15,000 – ₹5,000 = ₹10,000
        • The least of the above is ₹10,000, which would be the exempted HRA amount.

      Conclusion:
      HRA is an important component of salary that helps employees meet their rental expenses. Understanding the provisions for calculating HRA and the conditions for exemption can help employees optimize their tax liabilities.

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