House Rent Allowance - A tool of Tax planning for employees

House Rent Allowance (HRA) is second component which is found in each pay slip after basic salary.  This is the major contributor in tax relief for the employee who reside in rented house during his/her employment.

As announced in budget 2020, taxpayers who wish to opt for the New Income Tax Regime from AY 2021-2022 cannot claim the exemption of House Rent Allowance.

Generally employee submits Rent receipt and rent deed to his employer to claim exemption of tax on account of HRA but there are so many doubts & questions arise while calculating & claiming exemption of tax from HRA which I am trying to summaries here in “question-answer form”. your input in form of suggestion or query is solicited and most welcome :-

CBDT vide circular :08/2013 dated 10 Oct 2013 has made mandatory that If annual rent paid by the employee to his/her land lord exceeds Rs 1,00,000 per annum, he/she will have to report PAN of the landlord to the employer. 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 by the employee. I have already updated this information through my post dated 28 Oct 2013.

 I understand that it will help to make concept clear however more suggestions & input are welcome.

·        What is objective to claim exemption for House Rent Allowance? under Sec.10 (13A).

To meet expenditure actually incurred by an employee on account of payment of rent in respect of residential accommodation.

·        Which section HRA exemption has been granted?

Section 10(13A) of the Income Tax Act,1961 provides for the exemption from HRA.

·        What are condition to claim exemption?

An employee must fulfill following conditions to avail exemption:-

1.   He/she must stay in rented House during the period for which claiming exemption i.e. he/she does not stay in own house (property in his/her name)

2.  He/she must have actually incurred expenditure for payment of rent.

·        How shall exemption from HRA be calculated?

Calculation of HRA exemption is regulated by the Rule 2A of the Income tax Rules, 1962 which says that minimum amount of the following three shall be exempt :-

(a)   Actual amount of HRA received,

(b)   Rent actually paid minus 10% of salary

(c)    50% of salary if stayed in Delhi/Mumbai/Chennai/Kolkata or 40% of salary if stayed in other place.

·        If HRA received during the Financial year is more than the least of amount calculated, what would be consequence?

Excess amount shall be taxable and be treated as part of gross salary.

·        What does mean by salary for the calculation of HRA exemption?

It includes three components (i) Basic Salary, (ii)DA if considered for Retirement purposes and (iii)Commission forming part of Salary as a Fixed Percentage of Turnover achieved by the employee.

·        What will happen if employee stayed in two places during the financial year?

If he stays in two different places in same city, nothing will change however if he stay in different cities, it may affect if staying in Delhi/Mumbai/Chennai/Kolkat for one period and in other place for other period.  

·        What will happen if employee pays rent less than 10% of his salary?

Whole of the HRA amount received will be taxable.

·        If place of stay is different from place of employment, how HRA exemption shall be calculated?

The exemption must be calculated on the basis of the place where residential accommodation is situated because HRA exemption is for expenditure actually incurred for Rent even in relation the employment.

·        HRA exemption should be calculated on monthly basis or for whole of the year?

Exemption is for the period in which rental expenditure actually incurred and rental accommodation is occupied by the employee during the financial year therefore if there is no change in place or rent paid during the year, it can be calculated for whole year but if there is a change in any of the two during the year then it must be calculated on monthly basis and for the month in which rental accommodation occupied by the employee.

Further calculation of HRA exemption depends upon Salary or HRA actually received also thus if there is any change in salary or HRA amount in the period it must be calculated separately for that period.

·        If employee stay at parent house, can he claim exemption for HRA?

Yes, if he paid the rent actually to his parent.

·        What will happen if employee is paying rent to his/her spouse?

Relationship of husband-wife is not supposed to be commercial therefore it is better that no exemption should be claimed in such transaction.

·        Do employee need to submit any proof for payment of rent to claim HRA exemption?

Payment of actual rent is pre requisite for claiming HRA exemption and Assessing Authority may ask for proof of payment at the time of regular assessment but employee drawing HRA upto Rs.3000/- per month shall be exempted from production of rent receipt while submitting his claim to employer.  

·        Whether exemption of HRA is part deduction allowed u/s 80C?

No, HRA exemption is different from deduction u/s 80C and it does not be included in the amount eligible for deduction u/s 80C.

·        Can an employee avail tax benefit of HRA and Home loan both together?

Yes, Tax treatment of both is under different sections and both can be availed simultaneously.

• I have received HRA for 6 months only but changed my company which has not paid HRA , can I claim deduction under sec 80GG for 6 months?

A.  Yes you can claim deduction under section 80GG If following conditions are satisfied by you

(i) You have not received HRA for the period  for which you are claiming deduction under this section.

(ii) You or your spouse do not own any residential accommodation at the place where you currently reside.

• How much deduction can be claimed under section 80GG?

A.  Minimum amount of the following can be claimed as deduction:-

(i) Rs 5,000 per month;

(ii) 25% of adjusted total income;

(iii) Actual Rent less 10% of adjusted total Income

Meaning of 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)

•  Can I claim rent for two houses (one is occupied by me and other one is occupied by my parents) for HRA exemption?

A.  There is no restriction as such in the provision.

• If a person has earned 8 months’ salary during a financial year due to job break, is that person entitled for HRA exemption for the entire 12 months or only for 8 months?

A. Exemption for HRA allowance can be claimed for the period in which month you have received HRA, but for remaining period you may claim deduction u/s 80GG as explained above.

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(Published in www.taxguru.in)