"Complete Exemption Of House Rent Allowance Through Proper Tax Planning"


Under the Income Tax Act the maximum amount of house rent allowance permitted to be enjoyed by an employee tax-free is ..

  1. upto 50°/o of the salary in Mumbai, Kolkata, Delhi or Chennai and
  2. upto 4O°/o in other towns.

This is further subject to the fulfillment of other conditions of Rule 2A. One of the conditions is that the employee has to meet part of the cost of the house rent equal to IO°/o of the salary himself.

Thus, the employee has to so plan his house rent allowance that after meeting the cost of his rent himself to the extent of 10% of his salary the entire amount of house rent allowance becomes exempt from income tax.

If an employee is able to properly plan this aspect of the matter he can get the entire house rent allowance free of income tax. This is illustrated in the example as given in Illustrations 1 & 2.

Illustration-1 :
An employee stationed in Mumbai draws a monthly salary of 5,000. The employer is agreeable to grant him a house rent allowance upto 2,500 per month. He has taken a flat at a monthly rent of 3,000 after considering the various rules governing the exemption of house rent allowance. Thus, the maximum amount of house rent allowance which is exempt from income tax in the case of this employee as per Rule 2A would be the least of the following sums:

(a) The actual house rent allowance received by the employee, i.e. 2,500 per month;

(b) The excess of the house rent paid over 10% of the salary, namely, 3,000
--- 500 per month i.e., 2,500 per month;

(c)  2,500 i.e., 50% of 5,000 per month as the employee is stationed in Mumbai.

Illustration-2 .
A General Manager of a Private Limited Company in New Delhi is in receipt of salary of 25,000 per month. The employee is provided with a company leased accommodation the rent for which paid by the company is 18,000 p.m. Furniture of the value of 2 lakh has also been provided at his residence.

The valuation of perquisite for the AY 201 3-2014 in terms of Rule 3 would be as under

1. Perquisite value as per rule 3(1) @15% of 3 lakh
salary == 3,750 per month & yearly  =                                    45,000

2. Perquisite value in respect of furniture
@ 10% of original cost of Furniture =                                    20,000

Total value of perquisite                                                      65,000

Thus, by proper tax planning the employee has been able to take a flat at a rent not exceeding 3,000 which has enabled him to enjoy this entire house rent allowance of ‘ 2,500 per month completely tax-free. In this manner, by a proper application of the knowledge of the Income Tax Rule 2A in the matter of exemption of house rent allowance, an employee can take full benefit of the concession so provided by the Income Tax Law.
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Tax Planning For Rent-Free Residential Accommodation
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