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House Rent Allowance (HRA) – Meaning and Taxability

Meaning of House Rent Allowance (HRA):

House Rent Allowance

House rent allowance (HRA) is a pay component, employees receive from their employer to pay house related expenditure.

Taxability of HRA:

Every employee in India is entitled to claim HRA exemption if below mentioned conditions are met:

  • He/ she lives in a rented house &
  • Receives HRA as a pay component.

Exemption on HRA is arrived based on least of following three conditions:

  1. Actual HRA received.
  2. 40% (non – metro city) or 50% (metro city) of salary.
  3. Rent paid in excess of 10% of salary.

Salary here includes Basic salary and DA (If part of pay component)

Example of HRA exemption:

Sunil works in XYZ Ltd. He lives in a rented house in Mumbai for which he pays Rs. 5000 as rent. Following are the pay components of Sunil’s salary:

Basic 10,000
Dearness Allowance 2000
House Rent Allowance 3500
Conveyance 2500
Medical Allowance 900
Special Allowance 1000

 

Calculate the amount of HRA exemption for Sunil.

HRA Exemption for Sunil shall be least of following conditions:

  1. Actual HRA received:

3500

  1. 50% of salary (Basic + DA) as sunil lives in metro city:

(12,000 x 50)/100 = 6000

  1. Rent paid in excess of 10% of salary (Basic + DA):

5000 – 10% (12000) = 3800

So, amount for HRA exemption shall be 3500.

Income tax slab for FY 2015 – 16

The below given income tax slab is applicable for financial year 2015 – 16 and assessment year 2016 – 17.

Income tax slab for Financial year 2015 -16 & Assessment year 2016 – 17

(Amounts are in Indian rupees)

For Men and Women:

Rate Men Women
Exemption limit Up to 2,50,000 Up to 2,50,000
10% of taxable income Income between 2,50,001 to 5,00,000 Income between 2,50,001 to 5,00,000
20% of taxable income Income between 5,00,001 to 10,00,000 Income between 5,00,001 to 10,00,000
30% of taxable income Income more than 10,00,000 Income more than 10,00,000

For Senior citizens (Age between 60 and 80) and super senior citizens (Age above 80):

Rate Senior citizens Super senior citizens (Aged 80 and above)
Exemption limit Up to 3,00,000 Up to 5,00,000
10% of taxable income Income between 3,00,001 to 5,00,000 Nil up to 5,00,000
20% of taxable income Income between 5,00,001 to 10,00,000 Income between 5,00,001 to 10,00,000
30% of taxable income Income more than 10,00,000 Income more than 10,00,000

Surcharge: 12% of the tax amount, where taxable income is more than INR 1 crore.

Education Cess : 3% of tax amount and Surcharge.

Rebate: As per section 87A of Income tax act 1961, rebate of INR 2,000 will be given to those individual tax payers whose total taxable income doesn’t exceed INR 5,00,000.

Golden rules of accounting

Accounting is totally based on journal entry system. It is very crucial to put any entry at the right side otherwise the results would be fatal. To avoid the entry level mistakes, accountants use three basic rules which are also called ‘golden rules of accounting’.

These 3 golden rules of accounting are as follows:

  1. Debit the receiver, credit the giver
  2. Debit what comes in, credit what goes out
  3. Debit all expenses and losses and credit all income and gains.

Accounting is almost incomplete without these rules.

Relation between golden rules of accounting and types of account:

These rules of accounting are linked with types of accounts used in accounting. Before knowing the relation, it would be better to understand the different types of account.

Types of account:

There are three types of account as follows:

  1. Personal account
  2. Real account
  3. Nominal account

Now it would be easier to under the relationship between these two:

The very first rule i.e. debit the receiver and credit the giver, applies for all personal accounts.

The second rule i.e. debit what comes in and credit what goes out, applies for real accounts.

Last golden rule of accounting i.e. debit all expenses & losses and credit all income & gains, applies for nominal accounts.

Example:

Purchased furniture for 5,000 in cash

Account Type Rule
Furniture A/c Real Debit what comes in
Cash A/c Real Credit what goes out

Journal Entry:

Account Debit/ Credit Amount
Furniture A/c Debit 5000
Cash A/c Credit 5000

Goods sold for 3,000 on credit to XYZ Ltd

Account Type Rule
XYZ Ltd A/c Personal Debit the receiver
Sales A/c Nominal Credit all income & gains

Journal Entry:

Account Debit/ Credit Amount
XYZ Ltd A/c Debit 3000
Sales A/c Credit 3000

Electricity bill paid for 800

Account Type Rule
Expenses A/c Nominal Debit all expenses & losses
Cash A/c Real Credit what goes out

Journal Entry:

Account Debit/ Credit Amount
Expenses A/c Debit 800
Cash A/c Credit 800

 

 

Return on equity (ROE) – Meaning & Formula

Return on equity (ROE) is one of the profitability ratios used to measure the efficiency of a company to generate profit for its equity shareholders. This ratio indicates the relationship between net income and shareholder’s fund.

Return on equity is also known as ‘Return on net worth’.

Return on equity is used to compare the efficiency of a firm to generate profit, with other companies in same industry. If a company uses more debt instruments to raise funds, this ratio results in higher value however does not shows the true picture.

Formula for the calculation of return on equity (ROE):

ROE is calculated by dividing the amount of net income by shareholder’s fund. The formula which is used in this calculation is:

Return on equity = Net income / Shareholders’ fund

Net income refers to the amount of money remained after subtracting COGS, operating expenses, interest, taxes and preference shareholder’s dividend (not equity shareholder’s dividend) from total revenue.

Shareholder’s fund refers to equity share capital.

For a better picture, average shareholders’ equity is used instead of total shareholders’ fund. In this case formula is

Return on equity = Net income / Average shareholders’ fund

Average shareholders’ fund is calculated by adding the amount of equity capital at the beginning of financial year and equity capital at the end then the result is divided by 2.

Average shareholders’ fund = (Equity capital at the beginning + equity capital at the end) / 2

 

Cost of Goods Sold (COGS) – Meaning & Formula

Cost of Goods Sold (COGS) refers to those costs which are directly associated with production of goods or services. For manufacturing companies, amount of raw materials used in the manufacturing of goods is the cost of goods sold. It does not include any indirect cost like rent, wages, utilities etc.

The value of cost of goods sold is used in the calculation of gross profit, operating profit and net profit.

Formula for the calculation of Cost of Goods Sold (COGS)

Cost of goods sold is calculated by adding opening stock and purchases made during the financial year and then subtracting the amount of closing stock.

 Cost of goods sold = (Opening stock + Purchases) – Closing stock

Example:

ABC ltd has total stock of INR 1,00,000 on 1st April 2016. During the financial year 2016 to 2017, the company purchased raw material of INR 90,000 and ended up with stock worth of INR 1,10,000 on 31st March 2017.

COGS (for the financial year 2016 – 17) = (1,00,000 + 90,000) – 1,10,000 = INR 80,000