Along with the rest of the country, the salaried class waits for the annual budget to be announced each year. They look up to the government to provide them with higher take home pay by way of increase in tax free income and lowering of tax slabs. They also look for some relief through savings options providing tax benefits. Sometimes the hopes are fulfilled and at other times not.
Beyond the normal arithmetic of tax slabs, cess and surcharges, the salaried individual can claim the benefit of HRA exemption and fulfill his quest for a higher take home pay. Let us take a look at the dynamics of the HRA element in the individual taxpayer’s salary and how it can be managed to get tax exemptions.
HRA or House Rent Allowance is a salary component for most people belonging to the salaried class. It is usually calculated by applying a specified percentage on the basic pay component. This percentage depends on the class of city as defined by the HRA classification list published by the government.
Those receiving HRA and staying in rented accommodation are eligible to claim exemption. Let us look at the requirements for claiming such exemption.
A valid lease agreement between the landlord and the tenant (the employee in this case) is a necessary document which needs to be submitted to the employer for claiming tax benefit. The agreement must have all specific details regarding type of accommodation, rent to be paid, period of lease etc.
In order to provide the tax exemption benefit to the employee, the employer requires proper rent receipts to be submitted to them. At least three months’ rent receipts are necessary to be submitted by the employee. If the exemption claim as submitted by the employee is found to be legitimate then necessary tax exemption benefit will be passed on by the employer and the monthly Tax Deducted at Source (TDS) amount will get reduced to the extent of the exemption.
It may be relevant to mention here that no HRA tax exemption can be provided to the assessee employee unless proper rent receipts are submitted. It is therefore in the interest of the employee to ensure that the landlord provides proper receipts.
Where actual rent paid by the employee to the landlord is more than Rs. 100000/-, PAN of the landlord has to be declared as an IT compliance requirement criteria. In case the landlord does not have a PAN, a declaration to this effect from the landlord with his/her name and address can be gathered and retained for records.
All exemption claims backed by requisite documents have to be submitted to the employer within a stipulated time. Failure to do so will mean that the employer will not be in a position to provide the exemption. In such cases the employee may collect such rent receipts and claim the exemption for HRA at the time filing Income Tax Returns. The amount eligible for exemption will be refunded by the IT authorities.
Even if an employee is staying in a rented accommodation for the part of a year, he or she is entitled to claim HRA exemption for the period for which he was paying rent. For the remaining portion of the HRA, tax at applicable rate will be applied.
The least of the following is exempt:
[Salary will include Basic plus Dearness allowance (if provided by the terms of employment) plus commission based on fixed % of turnover]
Some employees may require staying in rented accommodation even when their employer is not paying them HRA through their salary.
The Income Tax Act provides tax benefits under section 80GG to such employees to the maximum extent of Rs.5000/- per month. In order to qualify and receive this tax exemption benefit the following criteria must be fulfilled:
i. Individual is salaried, self-employed or in business.
ii. Individual lives on rent, but is not paid HRA through salary.
iii. Individual does not own any house which is shown as self-occupied property in his/her Income Tax return.
iv. Spouse or minor child of the individual does not own a property where he resides or carries out any business or profession.
If the criteria as mentioned above are fulfilled then the least among the following computed amounts is allowed as exemption under section 80GG:
i. Rs. 5000 per month
ii. 25% of total income after allowing deductions under section 80
iii. Actual Rent paid less 10% of income after allowing deductions under section 80
Eligible people who claim HRA tax exemption or exemption under section 80GG can thus save some of their hard earned money from being eaten away by taxes.
The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at email@example.com
(Republished with Amendments)