Many salaried employees may not be aware of the House Rent Allowance (HRA) exemption and its potential benefits, especially if they’re not familiar with tax laws or if their employers haven’t adequately communicated these benefits. It’s essential for both employees and employers to understand HRA exemptions to maximize tax savings and ensure compliance with tax regulations.
We have seen many cases where salaried person declared rent less than what he actually pays due to house owner denied in providing PAN.
We have come across situations where salaried person is in presumption that entire HRA component in their salary is allowed as exemption and they are not aware of how income tax allows.
House Rent Allowance
Section 10(13A) of the Act grants exemption in respect of any house rent allowance received by an employee from his employer subject to the satisfaction of certain basic conditions. Rule 2A prescribes the quantum of exemption admissible.
Copy of Section 10(13A) as below:
any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant considerations.
Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—
(a) the residential accommodation occupied by the assessee is owned by him ; or
(b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him ;
Quantum of Exemption is specified in Rule 2A of Income Tax Rules 1962
For determining the quantum of exemption, the place where the accommodation is situated is divided into:
1) Major cities i.e., Mumbai, Delhi, Calcutta and Chennai
2) Other places
If living in major cities, Exemption is least of the following;
a) Actual HRA Received
b) Rent paid – 10% of Salary
c) 50% of Salary
Note: Salary = Basic + DA (forming part of retirement benefits) If living in other places, Exemption is least of the following;
a) Actual HRA Received
b) Rent paid – 10% of Salary
c) 40% of Salary
Note: Salary = Basic + DA (forming part of retirement benefits).
Example:
Mr. CA Koushik Reddy is working in MNC company and having gross LPA of Rs. 12,00,000 and components of LPA as follows:
a) Basic = Rs. 6,50,000
b) DA = Rs. 1,50,000
c) HRA = Rs. 2,00,000 and
d) Other Allowance = Rs. 2,00,000
Mr. Koushik is residing in 2BHK flat for rent in Bangalore and paying rent of Rs. 20,000 per month. His HRA exemption under sec 10(13A) is calculated as follows;
a) Actual HRA received [Rs. 2,00,000]
b) Rent Paid – 10% of Salary [Rs. (20000*12) – Rs. (10% of (650000+150000)) = Rs. 1,60,000]
c) 40% of Salary [40% of (650000+150000) = Rs. 3,20,000]
HRA Exemption is least among the three i.e., Rs. 1,60,000
Q & A
Q.1 Whether payee necessarily be the landlord?
Ans. There is no stipulation, either in section 10(13A) or in rule 2A, that the employee should pay the rent only to the landlord of the house occupied by the employee. Even in cases where payments are deposited in courts or with Rent Controller, the exemption can be availed by the employee.
Q.2 In case of assessee living in wife’s house, Can HRA be claimed by the Husband?
Ans. In Bajrang Prasad Ramdharani v. Asstt. CIT [2013] 37 taxmann.com 186/60 SOT 66 (URO) (Ahd. – Trib.) assessee’s claim for exemption under section 10(13A) was disallowed on ground that rent was paid by the assessee as tenant to his wife who was landlord and both were living together. The Tribunal held that since house was owned by wife of the assessee and the assessee had paid rent to her through bank transfer entry, the assessee had fulfilled twin requirements of section 10(13), i.e., occupation of house and payment of rent, and, thus, would be entitled to exemption under section 10(13A).
Q.3 Does Employer – Employee relationship is mandatorily required?
Ans. In CIT v. UK Bose [2013] 29 taxmann.com 219/212 Taxman 399 (Delhi) in return of income, the assessee disclosed salary received from ‘S’ and claimed deduction under section 10(13A) on basis of rent paid by him which had been debited from his salary directly. The Assessing Officer rejected assessee’s claim taking a view that income received by the assessee was not taxable under head ‘salary’ but under head ‘income from other sources’. It was held that since it was not case of the Assessing Officer that relationship between ‘S’ and the assessee was not that of a master and servant, impugned order passed by him was to be set aside and the assessee’s claim for deduction was to be allowed.
Q.4 Does PAN of the Land Lord Required?
Ans. Earlier, the government noticed that few employees submitted fake rent receipts to claim the HRA exemption and avoid paying taxes. Also, there are some cases where employees submit fake receipts higher than the actual rent.
If your yearly rent is above ₹1 lakh per annum, you’ll need to share your landlord’s PAN with your employer.
Q.5 Can I Claim Both HRA & Deduction on Home Loan Interest?
Ans. Yes, you can claim both HRA (House Rent Allowance) and deduction on home loan interest in India under certain conditions. This can be beneficial for taxpayers who are paying rent and also have a home loan.
Conditions for claiming both HRA and home loan interest deduction:
- You must be a salaried individual receiving HRA as part of your salary.
- You must be residing in a rented accommodation in the same city where you work.
- You must have availed a home loan for a property in your own name or jointly with your spouse.
Homeowners, who are paying back their home loan and getting HRA as part of their salary, can avail both the house property-related tax benefits to lower their taxable income. There can be cases where you work in one city and live on rent, your family resides in another city, and you buy a home where your family is.
A homeowner (salaried and living in rent home in another place) can claim:
1. HRA exemption towards rent payment
2. Deduction on home loan interest as per Section 24
3. Principal Repayment under Section 80C
4. Deduction for interest on home loan under Section 80EE or Section 80EEA
Conclusion: Navigating the complexities of HRA exemptions requires a comprehensive understanding of tax laws and regulations. Salaried employees and employers alike must familiarize themselves with the rules to optimize tax savings and ensure compliance. With proper knowledge and adherence to regulations, both employees and employers can benefit from HRA exemptions while avoiding potential pitfalls.
*****
Disclaimer: The content presented in this article is intended for informational and educational purposes only. It is not intended to serve as professional advice, legal counsel, or guidance in any specific situation. While efforts have been made to ensure the accuracy and reliability of the information provided, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the content contained herein. Readers are advised to consult with appropriate professionals or experts for specific advice tailored to their individual circumstances. Any reliance you place on the information presented in this article is strictly at your own risk. We shall not be liable for any loss or damage, including but not limited to indirect or consequential loss or damage, arising from the use of or reliance on the information provided in this article. Furthermore, inclusion of any links or references to external sources does not imply endorsement or validation of the information, products, or services provided by those sources. We do not assume any responsibility or liability for any errors or omissions in the content of this article. By accessing and using this article, you agree to waive any claims against us regarding the accuracy, reliability, or suitability of the information provided herein.
Author Bio
