Employees generally receive a
House Rent Allowance (HRA) from their employers to meet the cost of a rented
house taken by the employee for his stay. This allowance is generally a part of
the salary package or as stated in the terms and conditions of the employment.
HRA is taxable under the head Salary. Under the Income Tax Act, certain
exemptions in respect of HRA is allowed under section 10(13A) and is regulated
by Rule 2A.
The least of the following is
exempt from Income Tax.
amount equal to 50% of the salary if the rented house is situated in Delhi,
Kolkata, Mumbai or Chennai and an amount equal to 40% of Salary if the rented
house is situated at any other place.
2. The amount of House Rent
Allowance received by the employer in respect of the period during which the
rental accommodation is occupied the employee during the previous year,
3. The excess amount of rent paid
over 10% of the salary received by the employee during the previous year.
for the purpose of calculation of exemption shall mean the Basic Salary
received by the employee and includes dearness allowance if any. As decided in Hughes Softwares System Limited vs ACIT
Delhi (2013) (ITAT Delhi), it also includes any
commission/incentive received by the employee based on a fixed percentage of
turnover achieved by the employee as stated in the terms and conditions of
Example:Sumit, who resides in Ahmadabad gets a Basic
Salary of Rs 10,00,000 and HRA Rs 6,00,000. The rent paid by him is Rs.
7,00,000 . Calculate the amount of taxable House Rent Allowance for the
previous year 2013-14.
Answer: The least of the following is
exempt from income tax out of the HRA Rs 6,00,000 received by Sumit
(a) Rs 4,00,000 being 40% of the basic salary
received by Sumit .
(b) Rs 6,00,000 being the amount of HRA
received by Sumit .
(c) Rs 6,00,000 being the
excess of rent paid over the basic salary received by Sumit. (Rs. 10,00,000*10%
= Rs. 1,00,000. Rs. 7,00,000 – Rs. 1,00,000 = Rs 6,00,000)
the exempt amount is Rs 4,00,000.
Paid to Spouse/Parent
As decided in Bajrang Prasad
Ramdharani vs ACIT (ITAT Ahemdabad) (2013) for HRA exemption if the rent is
paid to spouse/parent is valid if all the below conditions are fulfilled:
residential accommodation occupied by the assessee is not owned by him
assessee has actually incurred expenditure on payment of rent in respect of the
residential accommodation occupied by him.
Allowable on Actual Payment of Rent
As decided in CIT vs P.D. Singhania (Allahabad High Court)
(2006) deduction is only allowed only if the rent is
actually paid by the assesee, therefore HRA exemption is allowed if proper
documents in support of rent paid (monthly rent receipts stamped are issued
monthly) and rent agreement is duly executed on a properly stamped paper.
10(13A) ‘Salary’ does not include bonus for Calculation of HRA :- Bonus cannot be regarded as
falling within the scope of the expression salary as defined in Clause (h) of
Rule 2. Clauses (b) and (c) of Rule 4 contain a clear indication that the
expression salary takes in only periodical payments made by the employer to the
employee during a year by way of remuneration. Commissioner
Of Income-Tax vs B. Ghosal (Kerala High Court) – 1980 125 ITR 744 Ker
Note: Normally in a rented property,
the electricity/water bills are borne by the tenant and therefore ensure that
such charges are paid out of the assessee’s own funds.
It is also advisable for the
landlord (spouse/parent) to declare the rented received as income in the Income
Tax return filed by him to avoid litigation.
deduction u/s 10(13A) and Housing Loan Exemption u/s 24(1)
own property and rented property are in different cities, both exemption can be
own property and rented property are in the same city deduction can only be
claimed if the assessee can prove that the own property is far off from the
work place and therefore he/she stays in the rented property.
Note that the own property should
be self occupied and not rented out to claim deduction on house loan.