Do you know about your HRA exemption.?.

How to get benefit of HRA in Tax Planning..?

For a salaried individual, HRA (House Rent Allowance) is important part of the salary slip. In our taxation rule, there are 3 type of tax deduction. First is the amount paid as a rent, the second is amount paid as principal amount of home loan and last is interest paid on home loan. Most of time, they don’t know how to calculate the exempted amount of HRA. For this they totally depend on their office accountant or friends. I am getting many friends and client call about HRA calculation. So today, I am going to discuss in detail about the HRA.

There are many doubts in the people’s mind about home loan and home rent exemption. I am taking one by one those doubts. The most common doubt that is HRA exemption applicable for both salaried individuals and self- employed. The answer is HRA benefit is not available to self-employed professional, as they don’t earn salary but they can claim benefits of house rent expenses according under section 80GG with subject to certain conditions.

The other most asked query is can anyone take both HRA and home loan benefit. The answer is yes. If you are paying rent, you can claim HRA benefit and if you are earning rent income from in the name of your property you can also claim the interest benefit. There is no direct connection between HRA and home loan tax benefit.

Some common situation faced by salaried person:

·         If the person live in own house then he cannot claim HR exemption. If he is paying home loan and paying EMI then he can claim tax benefit on principal mount and interest paid portion.

·         If the person has bought under construction property and staying in rented home in the same city then he can avail tax benefit of HRA and principal paid but cannot get benefit of interest till construction completed. Once construction complete, he can claim all interest paid during construction in 5 equal installment in the next 5 year from complete construction year.

·         If the person has bought home in other city and stayed in rent in the other city then he can claim HRA exemption and will get benefit of paying home loan of principal amount and interest paid.

·         If the person is paying home loan for home which is ready for occupation but not residing in it due to some reason like work place far away then he can claim tax exemption on HRA and tax benefit of home loan including principal and interest. You have to still pay tax on notional rent income even if your home remains vacant during the year. If you are getting rent then the rent income will add in income from other sources and taxable according to specific rule.

How to calculate the HRA exemption amount:

Lets take an example to understand how to calculate HRA exemption amount. Mr. A gets basic salary Rs 50,000 and HRA Rs 30,000 per month. He resides in mumbai and pays rent Rs 25,000 per month. Calculate the tax exemption amount of HRA?

There are 3 conditions and the least amount of these 3 is eligible for HRA exemption:

(A)  Actual HRA received: 30,000

(B)  50% of basic salary as he resides in metro city: 25,000 (For non-metro city it is 40% of basic salary)

(C) (Actual rent paid) - (10% of basic salary) it means (25,000- 10% of      50,000) = 25000-5000 = 20,000

According to the rule the least of the above 3 figure is eligible for tax exemption so exempted tax mount of HR is Rs 20,000 and taxable HR 30,000-20,000= 10,000.

You can pay rent to your parent and can still claim HRA exemption but in case of spouse you cannot claim HRA benefit.

One more important thing to remember, you have to submit the rent slip signed by owner as rent proof to your employer.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Do you know about Inflation- Indexed Bonds ?

Are Inflation-Indexed Bonds really helpful for the common investors..?

As per the promised by our finance minister Mr. P. Chidambaram in the budget speech, India’s first inflation indexed bonds to be launched on 4^th June. The objective of these bonds is to protect the savings of the poor the middle class as said by our finance minister. These 10 year bonds will have a fixed coupon rate and the principal value of the bond will be linked to the WPI (Wholesale Price Index). According to releasing RBI statement, these bonds will prove better option than gold and also protect the savings of poor from inflation.

In Inflation indexed bonds coupon rate will remain fixed but face value will be changed with the inflation. The RBI referred to a four-month indexation lag, which means January WPI would be used as a reference for bonds issued in June.

For example, if the face value of the bond is Rs 1,000, coupon rate 5% and maturity 10 year. So if inflation rises 8% then the face value will adjust to Rs 1080 and coupon rate 5% will calculate on new face value Rs 1080. So after adjusting the face value the investor will get Rs 54.

So now it has been clear that if inflation increases you will get higher coupon and higher principal as well at the time of maturity. If inflation drop then you will get less coupon but your capital is protected. It means you will get back your principal amount at the time of maturity if inflation drops.

Now come to the most critical part of this bond. These bonds are linked to the wholesale price index (WPI) and not to the consumer price index (CPI). At present according to latest govt. released data WPI is at 4.89% and CPI is 9.39%. Some analyst said that the government is not protecting the poor it is protecting itself from inflation and paying less then CPI to the poor and the middle class. WPI only include food, fuel and manufactured products but it does not include many all the common services.

Initially, the bond will be issued to only institutional investors. But after few months, retail investor having demat a/c can invest in it with minimum amount Rs10,000.

So in short, these bonds may not be fulfill its objectives to protect the poor and the middle class segment from inflation as it has not linked to the CPI and it is not available in simple medium like from banks, post offices.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com