(a) Employees living in hired (rented) houses. Sometimes the employer does not provide rent- free accommodation but instead makes a provision to pay some amount in cash, so that the employee may be compensated to some extent as far as rent is concerned. The amount of cash paid is known as House Rent Allowance. Out of the total H.R.A. received, an amount equal to the minimum of the following three items is exempted from tax u/s 10(1 3A) read with Rule 2A and balance, if any, will be added in the salary of the employee for tax purpose. The three items are
(i) 50% of salary in case of Bombay, Calcutta, Delhi and Madras, and 40% of salary in case of all other cities, or
(ii) Actual House Rent Allowance received; or
(iii) The amount by which the actual rent paid by the employee exceeds 10% of his salary.
Taxable HRA = Actual HRA received — Exempted amount
Important Notes :
Salary = Basic + DA (Enters) / DP + Commission on turnover
In Gestener Duplicators (P) Ltd. vs. CIT (1979) (S.C.), it was held that in case a commission is given to an employee and it is a fixed % of turnover achieved by such employee, such commission shall also be treated as part of the salary for House Rent Allowance.
Salary to be taken. For HRA exemption, salary is to be taken on due basis in suspect of the period during which rented accomodation is occupied by the employee during the previous year.
Cases when HRA is fully taxable. HRA is fully taxable in any of the following cases
If employee is living in his own house, or
If employee is living in a house for which he is not paying any rent, or
If rent paid does not exceed 10% of salary.
H.R.A fully Exempted. In case HRA is received by judges of High Court under High Court Judges (condition of service) Act I 94 and Supreme Court Judges under Supreme Court Judges (conditions of Service) Act, 1958 shall he exempted.
The Exemption of HRA u/s 10 (1 3A) read with rule 2A shall be available even if employee is living in a rented houses at a ace other than the place of his employment.