Letter : F. No. 12/19/64-IT(A-I), dated 2-1-1967

1. Reference is invited to the Central Board of Direct Taxes letter F. No. 12/19/64-IT(B), dated 22-2-1966 , where in it was intimated that the house rent allowance given at flat rates may be treated as exempt from income-tax without verification of the fact whether the employee concerned had paid any house rent and the allowance exempted is less than the difference between the actual expenditure on the house rent and 10 per cent of the salary of the employee.  These instructions were applicable for the financial year 1964-65 only.  As the system of paying house rent at flat rates to Central Government employees has since been withdrawn, these instructions are no longer in operation and may, therefore, be treated as cancelled.

2. Section 10(13A ) exempts from tax only the allowance granted by the employer to meet expenditure already incurred on payment of rent for the residential accommodation occupied by the employee. The limits for the purposes of exemption of house rent allowance under section 10(13A) have been laid down in rule 2A. Though for purposes of grant of house rent allowance, a rent receipt may not be insisted upon by Government, it is necessary for granting the exemption under section 10(13A) that the employee should have actually incurred the expenditure on rent. For purposes of deduction of tax, therefore, the disbursing officer should ensure that the employee concerned has in fact incurred the expenditure on rent. The payment of rent should be verified through rent receipts in the cases of all employees.

3. A reference is also invited to the Finance Ministry’s letter F. No. 12/19/64-IT(B), dated 8-1-1965, forwarding extracts of section 10(13A) and rule 2A relating to exemption of house rent allowance from income-tax.  It has come to the notice of the Finance Ministry that for purpose of working out the exempted amount of house rent allowance the limits laid down in rule 2A are not taken into consideration and the entire house rent allowance is being treated exempt from income-tax by some disbursing officers.  The amount of house rent allowance, which is to be treated as exempt from income-tax, has to be worked out in the following manner:

EXAMPLE 1 : Persons getting a salary of Rs. 600 p.m. and house rent allowance of Rs. 90 p.m., the expenditure incurred for rent of the house being Rs. 160 p.m.

As per clauses of rule 2A :

a. Rs. 90; b. Rs. 100 (expenditure on rent in excess of one-tenth of salary); c. Rs. 120; d. Rs. 300.

Since Rs. 90 is the least amongst the four amounts worked out as per clauses of rule 2A, only this amount will be treated as exempt under rule 2A.

EXAMPLE 2 : Persons getting Rs. 600 p.m. and house rent allowance of Rs. 90 p.m., expenditure on house rent being Rs. 140 p.m.

As per clauses of rule 2A :

a. Rs. 80; b. Rs. 90 (expenditure on rent in excess of one-tenth of salary);

c. Rs. 120; d. Rs. 300.

Exemption available will be for Rs. 80 as this is the least amount.

EXAMPLE 3 : Persons getting a salary of Rs. 600 p.m. and house rent allowance of Rs. 90 p.m., expenditure on rent being Rs. 60 p.m. or less.

As per clauses of rule 2A:

a. Rs. 90; b. Rs. nil (expenditure on rent in excess of one-tenth of salary);

c. Rs. 120; d. Rs. 300.

No exemption is available in this case.

4. It is also clarified that the house rent allowance paid to a person, who is living in his own house or in a house for which he does not actually pay any rent, is not exempt from tax in any circumstances.

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