Whats Better- House Rent Allowance or Deduction U/s 80GG?

CA Naresh Jakhotia

With handful of options to save tax for the salaried taxpayers, one can definitely explore the possibility of reducing tax bill by revisiting the exemption & deduction provision. One such tool is claiming an exemption towards rent payment of residential accommodation.

Employees generally receive a house rent allowance (HRA) as a part of the salary package, in accordance with the terms and conditions of employment. HRA is given to meet the cost of a rented house taken by the employee for his stay. Exemption on HRA is available under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. Taxpayer would be surprised to see that there is no amount wise upper ceiling on HRA exemption.

An employee can claim exemption on his HRA under the Income Tax Act if he stays in a rented house and is in receipt of HRA from the employer. In order to claim the deduction, an employee must actually pay rent for the house occupied. [HRA exemption benefit can be claimed only by the salaried taxpayer. Self employed person may save little tax by claiming deduction u/s 80GG if they are staying in a rented premise. Interestingly, deduction U/s 80GG cannot exceed Rs. 60,000/- p.a. whereas there is no such ceiling while claiming exemption u/s 10(13A). May be it is where salaried taxpayer have better favoring tax law provision as compared to self employed.]

In case one stays in an own house, nothing is deductible and the entire amount of HRA received is subject to tax. Exemption from HRA will be lowest of the following three factors:

1. Actual HRA received from the employer
2. Actual house rent paid by employee minus 10% of basic salary
3. 50% of the basic salary if employee live in a metro or 40% of basic salary if lives in a non-metro.

Minimum of above is allowed as income tax exemption on HRA. 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. 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.

Whether HRA & Home loan benefit could be availed simultaneously?

Misconception prevails that HRA exemption is not available if taxpayer also have availed housing loan. It’s wrong. If the taxpayer is staying in a rented house, HRA benefit can be claimed despite the fact that he owns another house (whether rented out or vacant, whether in the same city or elsewhere) & is claiming the tax benefit available on home loan also. The tax benefits against home loan and HRA are two separate independent deductions and have no direct bearing on each other. As long as employee is paying rent for rented accommodation occupied by him, HRA exemption could be claimed while also availing tax benefits of other self owned house property.

Whether PAN of the Landlord is mandatory for HRA claim:

Employees have to furnish the PAN of the landlord if the rent payment exceeds Rs. 1 Lacs p.a. [Circular No. 8/2013 Dated 10.10.2013 issued by CBDT]. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed with the employer by the employee.

[Though  incurring actual expenditure on payment of rent is a pre-requisite for granting exemption under  section  10(13A) by the employer,  as  an  administrative  measure, salaried employees drawing house rent allowance  up to Rs. 3,000/-  per  month are exempted from production  of rent  receipt to the employer/ disbursing authorities . It  may, however, be noted that this concession is only for the purpose of tax deduction at source, and, in the regular assessment of the employee, the Assessing Officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that  the employee  has  incurred  actual expenditure on payment  of  rent.]

(Author is a CA in Practice from Nagpur and is Partner in M/s. SSRPN & Co.)

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