Taxability of HRA depends on following two of factors : –
- Rented house i.e. the assessee MUST be living in a rented house. Deduction of HRA cannot be claimed when one is residing in his own house or is not paying rent at all.
- Place of residence i.e. in metro cities (Delhi, Bombay, Calcutta & Madras) or other cities.
CALCULATE THE FOLLOWING
- 50% of Salary* (if assessee is living in metro cities) OR 40% of Salary (if assessee is living in other cities)
- Deduct 10% of salary* from rent paid by the assessee.
Now take the least of the above calculated amounts & compare it with the amount of HRA received by the assessee. CASE 1 if calculated amount > HRA received then whole of HRA is exempt from tax CASE 2 if calculated amount < HRA received then the amount chargeable to tax is (HRA Calculated Amount). Note - * means that salary includes the following
1. Basic Salary 2. Dearness Allowance 3. Commission based on a fixed percentage of turnover (Sales) achieved by the employee as per terms of contract of employment.
Gurpreet Singh, CA