Q3A. Jayant is employed in Mumbai and is drawing Rs. 50,000 per month as salary.

Besides, he got one month salary as bonus. He is given an option by the employer, either to
accept HRA or a rent-free accommodation which is owned by the employer. HRA is
payable @ Rs. 10,000 per month, while the rent for accommodation in Mumbai is Rs.
12,000 per month. Advise Jayant, whether it would be beneficial for him to avail HRA or
rent-free accommodation provided by the employer (assuming Mr. Jayant has not opted
for section 115BAC of the Income tax Act, 1961)

Ans 3B. Calculation of tax liability of Jayant, in case he accepts rent-free accomodation

Particulars Amount(Rs.)

Salary : Rs. 50,000 * 12 6,00,000

Bonus : Salary of 1 month 50,000

Value of Rent free accommodation: 97,500

15% * (Rs. 6,00,000 + 50,000)

Gross Salary: 7,47,500

Less standard deduction under Section 16(ia) 50,000

Taxable Salary/Total Income 6,97,500

Tax Liability -

On First Rs. 2,50,000 -

(Rs. 2,50,000 to Rs. 5,00,000) @5% 12,500

On remaining Rs. 1,97,500 @20% 39,500

Rebate under Section 87A -

Net Tax 52,000

Add: Health and Education Cess @4% 2,080

Net Tax Liability 54,080

Rounded of Tax liability 54,080

Calculation of Tax Liaility of Jayant in case he accepts HRA

Particulars Amount(Rs.)
Salary : Rs. 50,000 * 12 6,00,000
Bonus : Salary of 1 month 50,000
Taxable HRA (Note 1) 41,000
Gross Salary: 6,91,000
Less: standard deduction under Section 16(ia) (50,000)
Taxable Salary/Total Income 6,41,000
Tax Liability -
On First Rs. 2,50,000 -
(Rs. 2,50,000 to Rs. 5,00,000) @5% 12,500
On remaining Rs. 1,41,000 @20% 28,200
Rebate under Section 87A -
Net Tax 40,700
Add: Health and Education Cess @4% 1,628
Net Tax Liability 42,328
Rounded of Tax liability 42,330

Extra Tax paid by Jayant, if rent free accommodation is obtained is opted is Rs. (54,080- 42,330)
that is, Rs. 11,750. Thus, option II of accepting HRA is better.

Notes:

1. According to section 10(13A) and rule 2A of Income Tax Act, HRA is exempted as
least of the following limits:
 i. HRA actually received, that is, Rs.1,20,000

ii. 50% of the salary i.e. 50% * Rs.6,50,000 = Rs.3,25,000

iii. Rent paid in excess of 10% of the salary i.e. (Rs. 1,44,000 -Rs. 65,000) = Rs.
79000

[Least of the above is Rs. 79,000, is allowed as exemption. Thus, taxable HRA would be : (Rs.
1,20,000- 79,000)= Rs.41,000]

2. It is assumed that both the houses under HRA and Rent free accommodation are
identical.

3. Bonus is not a part of salary for the purpose of computation of HRA.

4. It is assumed that the assessee has not opted for Section 115BAC of the Income tax
Act, 1961.