Saving Taxes, CITY COMPENSATORY ALLOWANCE And HRA - CiteHR
Pon1965
Construction
Saurabh.shrivastav
Manaer Hr & Admn, Prexus Health India
+2 Others

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Hello All,



I have received a job offer in Mumbai. Since I am not from Mumbai, I will be renting a place. I was advised to structure my salary in such a way that part of it would be House Rent Allowance- this way I could save on taxes by offsetting my actual rent against my House Rent Allowance



I was also told that my HRA exemption would be least of:

1. The actual amount of HRA received.

2. 40 per cent of salary. This increases to 50 per cent if you are renting out the house in Mumbai

3. Rent paid minus 10 per cent of salary (basic component + dearness allowance).



My company is giving me freedom to structure my salary in a way I find tax effective



My questions were as follows:

1. I want to reduce my total of “Basic+DA” component in order to get a higher HRA tax exemption. In that case, can I reduce my "Basic+DA" amount by say 1,00,000 and add that amount under "City Compensatory Allowance"???





2. IF I already have a Dearness Allowance, can I create a City Compensatory Allowance also?



3. For calculation of HRA "Rent paid minus 10 per cent of salary" - SALARY would only consist of Basic+DA, right?? Or is City Compensatory Allowance also counted as salary for HRA calculations???



My confusion is because the definition of DA and CCA is nearly the same, and i do not want CCA to be included in definition of "Salary" for HRA calculation.



PLEASE HELP!!! ALL SUGGESTIONS WOULD BE APPRECIATED

Hi,
CCA will be included in 10%. If you are reducing the basic & DA, the PF deduction on your part as well as employer contribution will also get reduced. PF is a very good high yielding savings instrument and therefore it is suggested not to reduce the Basic & DA. There are other tax free components like food coupons, medical assisatance, conveyance allowance, etc are available which you can opt for. Please note that beyond certain limit, you can not escape from the tax net.

Hello Pon,
Thx a lot. i spoke to an aspiring CA and he told me with full confidence that a salary could have both components- Dearness Allowance as well as City Compensatory Allowance, and that City Compensatory Allowance would not be included under defination of SALARY for HRA calculation...
Could someone clarify this. Also, what are food coupons?! Are they reimbursments?

Sujeet,
I think your CA is correct. It may be on Basic & DA.
Food coupons are provided by Sodexho/Accor thru your employers in various demoninations. You can opt for 100/- per day i.e. 3000 per month as tax free. These coupons can be exchanged for groceries in various ou.tlets and also in select restaurants

DA and CCA can co exist. DA is to support pay with the increasing inflation. CCA is mostly for Metro Cities.
In calculating "Rent paid - 10% "GROSS SALARY" - where your CCA will also be included.
Saurabh

Hi,

Please find below the Rule 2A of income tax rule which may clarify your doubts:

Rule 2A prescribes the quantum of exemption available, which will be the least of the following :



Bombay/Calcutta/Delhi/Madras

Other Cities





n Allowance actually received

n Allowance actually received





n Rent paid in excess of 10% of salary

n Rent paid in excess of 10% of salary





n 50 per cent of salary

n 40 per cent of salary



‘Salary’ for this purpose includes basic salary as well as dearness allowance if the terms of employment so provide. It also includes commission based on a fixed percentage of turnover achieved by an employee as per terms of contract of employment but excludes all other allowances and perquisites. In view of Explanation (ii) to rule 2A, basic pay, dearness allowance and commission are determined on ‘due’ basis in respect of the period during which rental accommodation is occupied by the employee in the previous year. Thus, emoluments of a period other than previous year are not to be considered, even though such amount is received (as well as taxed) during the previous year. Again, emoluments of the period during which rental accommodation is not occupied in the previous year are left out of computation. It is important to note that where rent paid is 10 per cent or less than 10 per cent of salary, no exemption will be admissible. Again exemption is denied where an employee lives in his own house, or in a house for which he does not pay rent.

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