Current financial year is coming to an end and its a right time to discuss various Income Tax exemptions and deductions to minimize tax outflow. One such exemption is House Rent Allowance or more popularly known as HRA. HRA is a salary component received by an employee from the employer. HRA is included in salary so that employee can take care of cost towards renting an accommodation. HRA is exempted from Income Tax under section 10(13A) of the Income tax Act, 1961 and Rule 2 of Income Tax Rules. In this post, besides discussing basics of HRA we will also discuss some not so known facts about HRA for the benefit of readers.
Who can claim HRA Exemption?
Some of the basic condition to claim HRA are
(a) Employee should be staying in Rented Accommodation
(b) Paying Rent for the House
(c) Employee should not be co-owner of the House e.g. if Husband and Wife are joint owners of property and Husband is claiming 100% tax benefits on Home Loan. If wife is paying rent to Husband to claim HRA tax exemption then exemption is not allowed in such cases.
(d) HRA should be part of salary package
In this section, 3 most common queries are
1. I am staying with my parents, Can i pay Rent to my Parents?
Answer is Yes, It is very much permissible under Income Tax Act provided property is registered in the name of your parent/s. One of my reader Richa from indore asked me that her parents are staying in a rented accommodation and she is staying with her parents. Her parents are paying rent to landlord and she is paying rent to her parents, can she claim HRA exemptions. Answer is NO in this case because parents are not the owner of property. Secondly, your parents should declare rent received as Rental Income in their Income Tax Returns. If both these conditions are fulfilled, you can claim HRA exemption on rent paid to your parents.
2. My spouse own a property and i pay rent to him/her, Can i claim HRA exemption?
Answer is NO, You cannot pay rent to your spouse and claim Income Tax exemption. Some of my readers asked Why? Answer is very simple, as per Indian Legal System and institution of marriage / marriage act, you are supposed to stay with your spouse.
Last year, there was a landmark judgment by Ahmedabad Income Tax Appellate Tribunal wherein a person was allowed to claim HRA exemption on rent paid to his wife. Please note that such judgments are delivered for specific case & situation and cannot be treated as law. It can always be challenged in higher court therefore till there is legal clarification on this topic it is advisable not to claim HRA exemption for rent paid to spouse. Income tax department is not obliged to allow the exemption based on judgment in particular case.
3. I am Self employed / Businessman / Salaried without HRA Component, Can i claim HRA exemption?
This is one of the least known fact that if you are self employed, businessman or salaried who don’t receive HRA then also Income Tax Act provide relief as a tax payer.
You can claim HRA exemption under section 80GG provided you fulfill following conditions
(a) You have not received HRA during Financial Year
(b) You are living in rented accommodation and paying rent from your earning
(c) You don’t own/co-own rented house. You can carry out your business activity in rented house.
(d) You don’t own any other residential property in city of residence e.g. if you have a self occupied house in Paschim Vihar in Delhi and rented another residential house in Ashok Vihar for business activity. In this case, you cannot claim HRA exemption.
(e) If you have another residential property in city of residence then being self employed / businessman you cannot claim both Home Loan Tax benefit (Loss from let out property) and HRA on pretext that you are staying close to your work place. I will discuss this clause for salaried employees later in the post.
You can claim HRA exemption under section 80GG by filing declaration in Form No 10BA
If above mentioned conditions are fulfilled then HRA exemption can be claimed as a least value out of following three options
– Rs 2,000 per month
– Rent Paid in excess of 10% of your total income*
– 25% of your total income*
*Total Income means taxable income from all sources
Rent Paid = Rs 10,000
Total Income = Rs 30,000
In this case, HRA calculation will be least of following
– Rs 2,000 p.m.
– Rent Paid in excess of 10% of your total income* = Rs 10,000 – Rs 3,000 = Rs 7,000 p.m.
– 25% of your total income* = Rs 7,500 p.m.
Least of above three options is Rs 2,000 p.m. therefore you can claim max HRA exemption of Rs 24,000 p.a. Normally, irrespective of total income or rent paid, max HRA exemption for self employed / businessman / Salaried without HRA is Rs 24,000 per annum.
How HRA is calculated?
For salaried employees with HRA as salary component, HRA exemption is restricted to least value among following three
– Actual HRA received from employer
– Actual Rent Paid minus 10% of Basic Salary#
– 50% of Basic Salary (If you live in Metro cities i.e. Delhi**, Mumbai**, Chennai and Kolkata) or 40% of Basic Salary# ( If you live in Non-Metro)
** Delhi include NCR regions like Gurgaon, Noida etc whereas Mumbai include MMR (Mumbai Metropolitan Region) like Thane, Navi Mumbai, Kalyan-Dombivali, Mira-Bhayandar etc
# Basic Salary = Basic + Dearness Allowance + Commission based on % of Turnover achieved by the employee.
Lets take Example (All calculations are monthly):
Basic Salary: Rs 90,000
HRA Received: Rs 40,000
Rent Paid: Rs 30,000
City of Residence: Thane (Mumbai Metropolitan Region)
Max exemption will be lowest of following
– Actual HRA received from employer = Rs 40,000
– Actual Rent Paid minus 10% of Basic Salary = Rs 30,000 – Rs 9,000 (10% of Basic Salary) = Rs 21,000
– 50% of Basic Salary = Rs 45,000
Least of three is Rs 21,000 therefore max HRA exemption is Rs 21,000. Balance amount i.e. Rs 40,000 minus Rs 21,000 = Rs 19,000 is taxable in the hands of the employee.
Imp Note: HRA is calculated on monthly basis. If there is a change in Rent Paid, Increase / Decrease in Basic Salary, change in HRA received or Change in city of residence from Metro to Non-Metro or vice versa then there will be corresponding change in HRA exemption for the month.
HRA as an Allowance
In Income tax, biggest confusion is between deduction and exemption. In layman terms, exemption means the component is non taxable provided the tax payer fulfill all conditions. Deduction means that particular amount is reduced from the taxable income. House Rent Allowance is exemption & in case of exemption if conditions specified under Income Tax Act are not satisfied then balance / full component becomes taxable. It cannot be deducted from taxable income.
To claim HRA exemption, you need to submit following proofs
(a) Rent Receipts: Normally 2 Rent receipts are sufficient, one for the beginning of FY and 2nd towards the end of FY. Some organizations ask rent receipts for all 12 months and others may demand 1 rent receipt for each quarter.
(b) If per month rent is more than Rs 8,333 then Rental Agreement is mandatory
(c) If rent paid is more than Rs 8,333 per month then you require PAN details of the landlord
Details like name and address of landlord, address of rented premises, rent amount and month for which rent is paid should be clearly written on rent receipts.
HRA and Home Loan Tax Benefits
I receive max queries on this subject. There are various permutations and combinations and accordingly tax treatment is different. Home Loan Income Tax Benefits & HRA tax benefits are linked to each other. Lets discuss tax treatment of HRA under some common scenarios with an assumption that you own a property and availed Home Loan. Home Loan tax benefits will also differ in each of the following scenarios which i discussed in my post on Home Loan Tax benefits.
(a) You are staying in your own House: You cannot claim House Rent Allowance Exemption. Entire component will be taxable in the hands of employee.
(b) You own a house in City A & staying on rent in City B: You can claim House Rent Allowance Exemption.
(c) You house is under construction and you are staying in same city on Rent: You can claim House Rent Allowance Exemption
(d) Your House is in City A and you are staying on Rent in same City: This is most common query. You can claim House Rent Allowance exemption provided you can prove that your house is far away from your work place e.g. your flat is in Gurgaon and your office is in Noida. In this case you can claim tax benefits on both Home Loan and HRA. Also you need to declare rental income in your Income Tax returns. If your flat is vacant then you should declare notional rent. I have explained all possible scenarios in my post, How to calculate income from House Property?
Through intelligent tax planning, you can minimize your income tax outflow. We will discuss more such available exemptions and deductions under income tax act in future posts.
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