TAX tips.. exempt on HRA

Being an IT guy I never really had to know the nuances of finance. But being part of the a modern bachelor community has its own disadvantages.Such as, not knowing how much tax you are paying and how much you can actually get a tax exempt on. This post is an attempt to provide information on managing your financial liabilities better. In next few lines you would know how much of your annual HRA, you can get tax exempt on.  

 

According to the Income Tax Act, the amount of HRA exempt is the least of:

·        The actual HRA received during the time an accommodation is rented.

·        The amount by which rent expenditure exceeds 1/10 of the total salary amount during same period. So if this amount is let say x , then x=( rent expenditure – 1/10 of total salary ) during same period.

·        40% of the total salary during relevant period.

Here is an example.

Let say a person gets a total salary of 4 lakhs in which 2 lakhs is basic and 1.5 lakhs is HRA. He pays an annual rent of 1.2 lakhs and stays in rented accommodation throughout the year.

In this case, the amount of HRA exempt would be calculated as least of:

·        Actual HRA received i.e. 1.5 laks

·        x = 1.2 lakhs -  (1/10) X 4 lakhs =80,000

·        40% of 4 lakhs =1.6 lakhs

As the least of above is 80,000 only this amount will be exempt from tax. The remaining 70,000 of HRA will be subjected to tax. 

Hope this helps.