Taxability, Exemption of House rent allowance [Section 10(13A)]

What is House Rent Allowance: – HRA is an allowance (Salary Component paid to employees by an employer towards payment of rent for residence of the employee.

Taxability of House Rent Allowance: – As House rent Allowance (HRA) granted by Employer to Employee is part of Salary. It will be taxable under the head “Income from Salary”.

Determination of Exemption Under House Rent Allowance (HRA): –

In case the individual resides in a metro city (Delhi, Kolkata, Mumbai, Chennai), HRA granted to an employee is exempt to the extent of least of the following: –

i) HRA actually received for the relevant period¹

ii) Rent paid (-) 10% of salary² for the relevant period

iii) 50% of salary for the relevant period

If Individual Resides in Other Cities other than Metro Cities (Delhi, Kolkata, Mumbai, Chennai),

HRA granted to an employee is exempt to the extent of least of the following: –

i) HRA actually received for the relevant period

ii) Rent paid (-) 10% of salary for the relevant period

iii) 40% of salary for the relevant period

¹Relevant Period means the period during which the accommodation was occupied by the Employee during the financial year.

²Salary for this purpose means basic salary, dearness allowance, if provided in terms of employment and commission as a fixed percentage of turnover.

Dependent factors in HRA Exemption: –

Following are the Dependent Factors in HRA Exemption: –

(i) Salary for the purpose of HRA Exemption: – for example, Mr. Amit whose Basic Pay was Rs. 20000 per month got increment from 01.07.2020 by Rs 4000. In this case, we have to calculate HRA exemption for the Period from 01.04.2020 to 30.06.2020 and from 01.07.2020 to 31.03.2021 with Basic of Rs. 20000 and Rs. 24000 Respectively assuming other things remaining constant.

(ii) Rent Paid-Whenever there will be change in rent paid, we calculate HRA exemption on the Basis of changes. I.e., Mr. Saransh Paid rent of Rs. 10000 per month to his landlord. Wef 01.09.2020, his landlord increased rent amount to 12000 per month. In this case, in this case, we have to calculate HRA exemption for the Period from 01.04.2020 to 31.08.2020 and from 01.09.2020 to 31.03.2021 with rent paid of Rs. 10000 and Rs. 12000 Respectively assuming other things remaining constant.

(iii) Place where employee Resides:- The place of residence is significant in HRA calculation as for a metro the tax exemption for HRA is 50% of the salary while for non-metros it is 40% of the salary. Whenever there will be change in residential Place from Metro city to non-Metro city or vice versa. We have to calculate exemption accordingly.

Questions on House Rent Allowance exemptions: –

1. Can I Claim Exemption in case of Own House?

No, we cannot Claim HRA Exemption in respect of accommodation in Own House or house in respect of which we have not incurred Rent.

2. Can I Claim Home Loan Interest as well as HRA Exemption?

Yes, there is no Relation of HRA exemption with Home Loan Interest. We may claim Interest Paid on Home loan u/s 24 under the head income from House Property of Income Tax Act,1961.

3. Can I Claim Deduction of rent paid if not Receiving HRA from Employer?

If we are not receiving HRA from Employer but paying Rent to Landlord for accommodation, we can claim the deduction of rent paid under section 80GG.

Conditions that must be fulfilled to claim this deduction:

a. You are self-employed or salaried

b. You have not received HRA at any time during the year for which you are claiming 80GG

c. You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry-on business or profession.

In case you own any residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. The other property would be deemed to be let out in order to claim the 80GG deduction.

4. How to Claim Deduction Under Section 80GG?

The least of the will be considered as the deduction under this section:

a. Rs 5,000 per month;

b. 25% of adjusted total income*;

c. Actual Rent less 10% of adjusted total Income*

*Adjusted Total Income means Total Income Less long-term capital gain, short-term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U (except deduction under section 80GG).

5. Can I Claim HRA exemption When Living with Parents?

Yes, We can claim HRA Exemption, Let’s understand this with an example. Jyoti works in an MNC in Delhi. Though her company provides her with HRA, she lives with her parents in their house. Jyoti can pay rent to her parents and claim the allowance provided. All she has to do is enter into a rental agreement with her parents and transfer money to them every month. This way Jyoti can claim Exemption on HRA. Her parents will have to show the rent she paid on their income tax returns.

6. Can I Claim HRA exemption for rent paid to Spouse?

Yes, Exemption is available even house is owned by Spouse and for which rent is regularly paid (there is no legal requirement but in such cases, rent should be paid regularly on monthly basis through bank transfer entry)-Bajrang Prasad Ramdharani Vs. CIT(2013)60 SOT66(Ahd.)

7. What are the necessary documents required to claim HRA?

To claim HRA, rent receipts, rent agreement are required to submit your employer before the end of the financial year.

If the amount of rent exceeds Rs 1 lakh/annum, the PAN No of the landlord is also required. This will help you get exemption in your form-16 and you can avoid further troubles during your Income-tax return filing.

8. Is rent receipt mandatory for claiming HRA?

Yes, the rent receipt is a mandatory document to claim HRA. If an employee receives HRA in excess of Rs. 3000/month, it is necessary to present rent receipts to the employer for claiming HRA.

9. When Do You Need Landlord’s PAN?

If you have taken a house on rent and are making a payment in excess of Rs 1 lakh annually – remember to provide the landlord’s PAN. Else, you may lose out on the HRA exemption.

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Disclaimer:- This material and the information contained is intended to provide general information on a particular subject or subjects and in not an exhaustive treatment of such subject(s). The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business.