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The exemption from tax with regard to HRA is restricted to the least of the following amounts:-
(i) Actual amount of H.R.A.
(ii) The amount by which actual rent paid by the employee exceeds 10% of his salary; and
(iii) 50% of salary if the rented house is situated at Delhi, Bombay, Kolkata or Chennai, or 40% of the salary in the case of other cities.
As per the explanations given in the Income tax site (Check this IT publication)
“Salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
For throwing further light on this and especially for getting clarification on the term “if the terms of employment so provide” mentioned above, GConnect Team contacted our well known friend and GConnect member Shri.J.Lakshmi Narayanan, Deputy Office Superintendent, Central Excise Department, Salem, who always comes to our rescue with his in depth knowledge on administrative matters.
He clarified this aspect as follows.
“As per explanation given under Rule 3 of IT Rules which clearly stipulates that ” salary includes the pay, allowances, bonus payable monthly or otherwise but does not include the following viz., :- (i) Dearness Allowance or Dearness pay unless it enters into the computation of superannuation or retirement benefits of the assessee concerned ”
As per our extant Pension Rules 1972 pay plus DP will only form part for the retirement benefits. Whereas in the New Pension Scheme it is otherwise (i.e) 10% of pay + DA + DP is the subscription by the employee and contribution by the employer.
Thus in so far as CG employee other than NPS employees are concerned, salary will be pay and dearness pay only for the purpose of exemption in respect of HRA under Income Tax Rules.”
Other aspects of HRA :
In the case of employee residing in his own house, is the HRA exempt from Tax ?
No. As he is not paying any rent, so exemption from tax with regard to H.R.A. is restricted to ‘Nil’.
Should Rent receipt compulsorily be given to DDO ?
No. salaried employees drawing house rent allowance upto Rs.3,000 pm will be exempted from giving rent receipt to DDO. But in the regular assessment of the employee, the Assessing Officer is free to make enquiry or request proof of payment of rent by assessee.
Here is an online tool to calculate Income Tax exemption on HRA