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House Rent Allowance – Taxability & Exemption

First I would like to wish you all “Happy New Year”, may you all have a wonderful year ahead. In my today’s article I will discuss about the House Rent allowance (HRA). Now the catch here is that you an employee might trust your employer for allowing you the HRA, but at the same time you should know the right way of treatment of HRA in your Income Statement while you are filing your Income Tax Return. A smart individual is the one who is not banking on this Chartered accountant but surely the one who at least having the knowledge of the transactions occurring during the year in his income statement.

HRA is given to meet the cost of a rented house taken by the employee for his stay. This is a part of the salary. HRA is given by the employer due to generally accepted Business practice.
Taxability & Exemption:
HRA is an allowance and is subject to Income Tax. HRA received from the employer is taxable under head “Income from Salaries”. However Income Tax Act, 1961 allows for Exemption in respect of the HRA paid to employees. The exemption on HRA is covered under Section 10(13A) of the Income Tax Act, 1961 and Rule 2A of the Income Tax rules. It is to be noted that the entire HRA is not deductible.
Conditions to claim Exemption:
  • An employee can claim exemption under the Income Tax Act if he stays in a rented house and is in receipt of HRA from his employer.
  • Employee must actually pay rent for the house which he occupies.
  • The rented premises must not be owned by him. In case one stays in an own house, nothing is exempt u/s 10(13A).
What are the dependent factors in calculating HRA for the salaried individual?
Exemption of HRA is based on following factors
  • HRA Received;
  • Rent Paid;
  • Salary; &
  • Place of Residence (Metro Vs. Non-Metro)
If these aspects remain constant through the year, then tax exemption is calculated as a whole annually, if this is subject to change, as in a rent hike, pay hike or shift in residence etc., then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.
The place of residence is significant in HRA calculation as for a metro the tax exemption for HRA is 50% of the basic salary while for non-metros it is 40% of the basic salary. This holds true especially when you work at a metro and reside at a non-metro. In this case, your city of residence only will be considered for calculating your HRA.
Quantum of Exemption:
As long as the rented house is not owned by the assessee, the exemption of HRA will be available up to the the minimum of the following three options:
  • Actual house rent allowance (HRA) received from your employer
  • Actual house rent paid by you minus 10% of your salary
  • 50% of your salary if you live in a metro (i.e. Mumbai, Delhi, Chennai & Kolkata) or 40% of your salary if you live in a non-metro
Least of above will be exempt.
Note: The exemption will be available only for the period during which the rented house is occupied by the employee and not for any period after that.
Meaning of Salary for calculation the exemption of HRA:
  • Salary means (Basic + D.A + Commission based on fixed percentage on turnover).
Note: Salary is to be taken on due basis in respect of the period during which the period accommodation is occupied by the employee in the previous year.
Now let’s understand the entire concept with the help of Example:
Mr. Vijay (working at New Delhi) has received following amount during the previous year 2013-14.
(1)   Basic Salary – Rs. (10,000*12) – Rs. 1,20,000/-
(2)   Dearness Allowance (D.A) – Rs. (2,000*12) – Rs. 24,000/-
(3)   House Rent Allowance (H.R.A.) – Rs. (5,000*12) – Rs. 60,000/-
(4)   Actual Rent Paid – Rs.(4,000*12) – Rs. 48,000/-
The minimum of the following amount shall be exempt
 ⇒ Actual HRA received (5,000*12) – Rs. 60,000/-
⇒ Rent Paid in excess of 10% of salary ( 48,000-14,400) – Rs. 33,600
⇒ 40% of Salary – Rs. 57,600/-
Therefore, Rs. 33,600 shall be exempt and the balance Rs. 26,400 shall be included in gross salary.
Frequently Asked Questions:
How is HRA accounted for in the case of a salaried individual and a self-employed professional?
HRA (house rent allowance) is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. On the other hand, self-employed professionals cannot be considered for HRA exemption under this act, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.
Can I pay rent to my parents or spouse to avail HRA benefits?
You can pay rent to your parents, however, they need to account for the same under ‘Income from other sources’ and will be entitled to pay tax for the same.
On the other hand, you cannot pay rent to your spouse. In view of the relationship when you take up residence together, you are expected to do so and hence such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny, so steer clear of these.
Do I need to submit any proof for my HRA claim?
You need to submit proof of rent paid through rent receipts, for which only two need to be submitted, one for the beginning of the year and one towards the end of the financial year. It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it etc.
Can I simultaneously avail tax benefits on my home loan and HRA?
The tax benefits for Home Loan and HRA are two separate entities and have no direct bearing on each other. As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under income from other sources.
Disclaimer: The views contained in this article are the personal views of the author and the contributors and do not necessarily represents the views of Income Tax or any other Authority. Before reaching to any conclusion in respect of the matter stated herewith, you are advised to consult the concerned provisions of law. The author, publisher or the contributors are not responsible for any financial loss to the readers.

Source: TaxGuru

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