House Rent Allowance (HRA) is the second component that is found in each payslip after the basic salary. This is the major contributor in tax relief for the employee who resides in a rented house during his/her employment.
Generally, an employee submits Rent receipt and rent deed to his employer to claim exemption of tax on account of HRA however, CBDT vide circular:08/2013 dated 10 Oct 2013 has made mandatory that if annual rent paid by the employee to his/her landlord 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.
Apart from this new requirement, there are numerous doubts & questions that have arisen while calculating & claiming exemption of tax from HRA. These are:
Q. What is the objective to claim an exemption for House Rent Allowance under Sec.10 (13A)?
A. To meet expenditure actually incurred by an employee on account of payment of rent in respect of residential accommodation.
Q. Which section HRA exemption has been granted?
A. Section 10(13A) of the Income Tax Act,1961 provides for the exemption from HRA.
Q. What are the conditions to claim an exemption?
A. An employee must fulfill the following conditions to avail exemption:-
1. He/she must stay in a 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.
Q. How shall exemption from HRA be calculated?
A. Calculation of HRA exemption is regulated by the Rule 2A of the Income tax Rules, 1962 which says that a 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 another place.
Q. If HRA received during the financial year is more than the least amount calculated, what would be the consequence?
A. Excess amount shall be taxable and be treated as part of gross salary.
Q. What does 'salary' include for the calculation of HRA exemption?
A. 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.
Q. What will happen if an employee stayed in two places during the financial year?
A. If he stays in two different places in the same city, nothing will change. However, if he stays in different cities, it may affect if staying in Delhi/Mumbai/Chennai/Kolkata for one period and in another place for another period.
Q. What will happen if the employee pays rent less than 10% of his salary?
A. Whole of the HRA amount received will be taxable.
Q. If the place of stay is different from the place of employment, how HRA exemption shall be calculated?
A. 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.
Q. HRA exemption should be calculated on monthly basis or for the whole of the year?
A. 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 the 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.
Q. If an employee stays at his parent's house, can he claim an exemption for HRA?
A. Yes, if rent has been paid to the parents.
Q. What will happen if an employee is paying rent to his/her spouse?
A. Relationship of husband-wife is not supposed to be commercial therefore it would be better than no exemption should be claimed in such transaction.
Q. Do employees need to submit any proof for payment of rent to claim HRA exemption?
A. Payment of actual rent is a prerequisite for claiming HRA exemption and the Assessing Authority may ask for proof of payment at the time of regular assessment but employee drawing HRA up to Rs.3000/- per month shall be exempted from production of rent receipt while submitting his claim to employer.
Q. Whether the exemption of HRA is a part deduction allowed u/s 80C?
A. 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.
Q. Can an employee avail tax benefit of HRA and deduction for Interest on Home loan both together?
A. Yes, the Tax treatment of both is under different sections and both can be availed simultaneously.
Q. 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 the 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.
Q. How much deduction can be claimed under section 80GG?
A. Minimum amount of the following can be claimed as a 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)
Q. Can I claim rent for two houses (one is occupied by me and another one is occupied by my parents) for HRA exemption?
A. There is no restriction as such in the provision.
Q. If a person has earned 8 months’ salary during a financial year due to job break, is that person entitled to 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 the remaining period, you may claim deduction u/s 80GG as explained above.
Sources:-
- Section 10(13A) read with Rule 2A of the Income Tax Act,1961
- Circular: No. 90 [F. No. 275/79/72-ITJ], dated 26-6-1972 by CBDT
- Letter: F. No. 12/19/64- IT(A-I), dated 2-1-1967 By CBDT
- Circular : No. 9/2003, dated 18-11-2003/[Para 5.2-(9)].
- CIRCULAR NO: 08/2013 dated 10th Oct 2013
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