This article is all about the House Rent Allowance (HRA). This will cover what is HRA, How is HRA accounted for in the case of a salaried individual and a self-employed professional, What are the dependent factors in calculating HRA exemption, What are the conditions for availing exemption, What is the formula for calculating HRA exemption, What are proof for HRA claim and Examples for calculation of exemption/deduction of HRA.
|Basis||Salaried individual||Self-employed Individual
|Tax accounting||Under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules.||Under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.|
Keep four aspects in mind:-
1. HRA received,
2. The actual rent paid and
3. Where you reside, i.e., if it is a metro or non-metro. * caution – place of residence is significant and not place of employment.
4. The place of residence is significant in HRA calculation.
Imp:- The above factors shall be calculated on monthly basis.
Note: Metro cities will cover Mumbai, Kolkata, Delhi or Chennai
Caution – The rented premises must not be owned by him. In case one stays in an own house, nothing is deductible and the entire amount of HRA received is subject to tax.
Minimum of the following three options:
1. Actual house rent allowance received from your employer
2. Actual house rent paid by you minus 10% of salary
3. 50% of salary if house is situated in a metro cities or 40% of salary if house is situated in a non-metro cities
This minimum of above is allowed as income tax exemption on house rent allowance.
Salary here means basic salary which includes dearness allowance if the terms of employment provide for it, and commission based on a fixed percentage of turnover achieved by the employee. All the components shall be taken on due basis.
Caution: salary is taxable on due or receipt whichever is earlier (sec 15) but for calculating HRA exemption all components shall be taken only on due basis.
Caution: The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.
|As per tax rule||No restriction||No restriction||No restriction||No restriction|
|Tax impact on recipient||To account for the same under ‘Income from other sources’. [Sec 56]||To account for the same under ‘Income from other sources’. [Sec 56]||To account for the same under ‘Income from other sources’. [Sec 56]||To account for the same under ‘Income from other sources’. [Sec 56]|
|Practical view||Practically possible||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.||Practically possible||Practically possible|
No restriction in case you have proper justification for the same.
X has received following amount during the previous year.
1. Basic Salary – Rs. (5000*12) – Rs. 60,000/-
2. Dearness Allowance (D.A) – Rs. (1000*12) – Rs. 12000/-
3. House Rent Allowance (H.R.A.) – Rs. (2000*12) – Rs. 24000/-
4. Actual Rent Paid – Rs.(2000*12) – Rs. 24000/-
The minimum of the following amount shall be exempt
Therefore, Rs. 16800 shall be exempt and the balance Rs. 7200 shall be included in gross salary.
There are cases where employees pay their rent in cash and landlord refuses to provide any rent receipts.
What employees do-
Employees prepare rent receipts themselves and do forge signatures. Also there might be cases where employees actually do not pay any rent but still prepares rent receipts.
These all are covered under forgery cases and offences under giving false evidence and fabricating false evidence of IPC (Section 191 & 192).
What employer should do if such cases are identified in his company:-
Sack the employee.
(For any queries author can be reached at firstname.lastname@example.org)
(Republished with Amendments carried out by Taxguru Team)
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