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Did you know? The tax exemption on your HRA
January, 23rd 2017

This is that time of the year when employers ask you to furnish proofs of investments and expenses that qualify for tax deductions. The income-tax Act allows you to make claim for investments made in certain instruments, such as: Public Provident Fund, National Savings Certificate, equity-linked savings schemes and insurance premiums. Expenses such as tuition fees, interest on home and education loans and house rent paid by employees are also exempt from tax to a certain extent.

While most of these investments are considered for exemption on actual basis, the calculation of house rent allowance (HRA), which you can claim towards tax deduction, is more complex.

Here is a look at how much HRA you can claim.

Before you calculate how much HRA you are entitled to, you need to know if your HRA is part of your salary or not because tax exemption limits are based on this.

If HRA is a part of your salary: The allowance is eligible for tax exemption under section 10(13A) of the income-tax Act, provided your salary structure includes this provision.

To determine how much HRA you are eligible for, you will have to calculate three amounts, and the least of these three is what you will be allowed to claim as HRA.

The first thing to calculate is the actual HRA received from your employer. The second is 50% of your salary, if you are living in a metro city or 40% of your salary if you are living in a non-metro city. Third, the actual rent paid minus 10% of your salary.

For these calculations, your salary includes your basic salary along with dearness allowance and turnover-based commission, if any.

Let us assume that your basic salary is Rs60,000 and you get dearness allowance of Rs10,000. Further, you are entitled to claim Rs35,000 as HRA by your employer and you live with your family in a rented house in New Delhi and pay Rs30,000 per month as rent. In this case, your HRA would be the lower of Rs35,000 (actual HRA received), Rs35,000 (50% of your salary) or Rs23,000 (actual rent paid minus 10% of salary, including basic salary and dearness allowance: Rs7,000).

Therefore, in this case, only Rs23,000 per month will be allowed as HRA, for tax calculation purposes.

If HRA is not a part of the salary: Individuals who are self-employed or do not receive HRA as part of their salary, and stay in a rented house, can also claim the tax deduction in respect of the rent they pay, under section 80GG of the income-tax Act.

Here, too, you will need to determine three amounts and the least of these can be claimed for exemption.

First, the actual rent paid minus 10% of the total income. Second, 25% of total income. Third, Rs5,000 per month.

Do remember that the total income in this calculation is income after excluding long-term and short-term capital gains, and deductions under sections 80C to 80U, except the deduction under 80GG.

For instance, if your total income is Rs5 lakh and you pay an annual rent of Rs1.2 lakh, the rent you can claim as exemption under section 80GG would be the lowest of Rs70,000 (actual rent paid minus 10% of total income), Rs1.25 lakh (25% of total income) or Rs60,000 (maximum limit, Rs5,000 a month).

Therefore, you will be eligible for a tax exemption of Rs60,000 against the rent that you have paid.

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