| Employees generally receive a house rent allowance | | | | - The amount by which the rent expenditure actually |
| (HRA) from their employers. This is a part of the | | | | incurred by the assessee exceeds one-tenth of the |
| salary package. HRA is given to meet the cost of a | | | | amount of salary due to the assessee in the relevant |
| rented house taken by the employee for his or her | | | | period |
| stay. The Income Tax Act allows for deduction in | | | | - 40% of the salary due to the assessee in the period |
| respect of the HRA paid to employees. It is to be | | | | HOW THE DEDUCTION IS ARRIVED AT |
| noted that the entire HRA is not deductible. HRA is an | | | | Here is an illustration for the year 2009-10. Assume an |
| allowance and is subject to income tax. An employee | | | | assessee gets a salary of Rs 5 lakhs as basic salary |
| can claim exemption on his HRA under the Income | | | | and Rs 2.5 lakhs as HRA. He pays an actual rent of |
| Tax Act if he stays in a rented house. In order to claim | | | | Rs 1.5 lakhs. In such a case, the amount of HRA |
| the deduction, the rented premises must not be owned | | | | exempt would be calculated as: |
| by the employee. In case one stays in an own house, | | | | - Actual HRA received — Rs 2.5 lakhs |
| the entire amount of HRA received is subject to tax. | | | | - Excess of rent paid over 10% of salary i.e., Rs 1.5 |
| According to the Income Tax Act, the amount of HRA | | | | lakhs less Rs 50,000 (10% of salary) = Rs 1 lakh |
| exempt is the least of: | | | | - 40% of salary (40% of Rs 5 lakhs) = Rs 2 lakhs |
| - The actual amount of allowance received by the | | | | As out of this Rs 1 lakh is the least, it will be allowable |
| assessee in the relevant period during which the | | | | as a deduction from salary for the year. The balance |
| rented accommodation is occupied by him | | | | HRA of Rs 1.5 lakhs will be subject to tax. |