House Rent Allowance (HRA) is allowance paid by employers to their employees as a compensation for the rent they pay for residing at homes in the city where their work place is located. However, it is paid to employees by their employers irrespective of the fact that they reside in a rented accommodation or self owned property. In case of Government employees, House Rent Allowance (HRA) is paid @30% of sum of Basic Pay and Dearness Allowance. However, in case the Government employee resides in staff quarters provided by the government, he/she is not entitled to receive any House Rent Allowance. Also, if both the husband and wife reside in government quarters and both are government employees; neither will be entitled to receive House Rent Allowance. However, in case of private enterprise, all employees are given HRA as a part of salary as majority of the private enterprise does not provide accommodation to its employees. However, in case a private enterprise provides company owned accommodation to its employee, the accommodation will be taxable as a perquisite in the hands of the private sector employee.
Taxability of House Rent Allowance:
House Rent Allowance (HRA) if received by the employee is taxable in the hands of the employee. The taxability is same for government employees and private sector employees.
Income Tax Exemption for HRA
The exemption for HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. Conditions to be satisfied to claim HRA exemption are as follows:
a) An employee must reside in a rented house and pay rent to its owner.
b) He must receive house rent allowance from his employer.
c) He must produce proof of payment of rent to his employer in the form of rent receipts and/or leave license agreement.
In case of fulfillment of above conditions, HRA will be exempt to the extent of the minimum of the following 3 amounts calculated as follows:
a) Actual House Rent Allowance received by the employee in respect of the relevant period
b) Excess of rent paid for the accommodation occupied by him over 10% of salary for the relevant period
c) 50% of the salary where the residential house is situated in Mumbai, Calcutta, Delhi or Chennai and 40% of the Salary where the house is situated at any other place during the relevant period.
Let us understand these conditions with the help of an example: Mr. A has the following salary structure as mentioned in the below table.
Therefore the exemption under sec 10(13A) is Rs. 54,000/- assuming Mr.A stays in a non-metro city. Balance HRA of Rs. 6,000 (60,000-54,000) is taxable as Salary.
Points to be noted while calculating exemption is as follows:
1) Relevant period means period during which the said accommodation was occupied by the employee claiming exemption during the financial year
2) Salary for the purpose of calculation of HRA exemption means sum of basic salary, dearness allowance and commission based on fixed percentage of turnover.
3) If the rent paid by the employer to his landlord is more than Rs.1.00 lakh per annum then PAN card of the landlord is required to be furnished as per an Income Tax Circular No. 8/2013 Dated 10.10.2013 issued by CBDT. Also, employees who get HRA up to Rs.3000 per month are not required to produce rent receipts as proof. However, this concession is only for the purpose of tax deduction of source (TDS) and in the regular assessment of the employee, the Assessing Officer would be free to make such inquiry as he deems fit for the purpose of satisfying himself that the employee has incurred actual expenditure on payment of rent.
1) Also an employee can also stay in the house owned by his parents and pay them rent. The rent paid by the employee to his parents is also eligible for calculating HRA exemption. However, the parents need to add such rental income along with their other taxable income in order to pay tax if any on the rent received by them from their sons or daughters.
2) On the other hand, an employee cannot pay rent to his spouse and claim HRA exemption. In view of the relationship, if a married couple takes up a residence together, they are expected to do so and hence such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny, so steer clear of these.
3) The income tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other. As long as an employee is paying rent for an accommodation, the employee can claim tax benefit on HRA component of his salary while also availing tax benefits of his home loan
What if the employee pays rent but does not receive House Rent Allowance from his employers? Does he get any tax benefit?
Section 80GG allows tax deduction to employees who pay rent but do not receive House Rent Allowance from their employers on fulfillment of following conditions:
1) The employee does not receive House Rent Allowance from his employer.
2) The employee does not own:
(i) any residential accommodation himself or by his spouse or minor child or where such Individual is a member of a Hindu Undivided Family, by such family, at the place where he ordinarily resides or performs duties of his office or carries on his business or profession; or
(ii) at any other place, any residential accommodation being accommodation in the occupation of the Individual, the value of which is to be determined under Section 23(2)(a) (i.e occupation of a house by the owner for the purposes of his own residence).
3) The individual files a declaration under form 10BA.
If the employee satisfies the above conditions, he will be entitled to the least of the following amounts as deduction from his salary:
1) Rent paid minus 10 percent the total income.
2) Rs 2,000 per month.
3) 25 percent of the total income.
Total income under section 80GG is Gross total income less Long Term Capital gains, Short Term Capital gain us/111A, deductions under Section 80C to 80U except Section 80GG and income u/s115A.
Let us understand these conditions with the help of an example: Mr. A has an income structure as mentioned in the below table.
Therefore the deduction under sec 80GG is Rs.24,000/- The deduction will also not be available to an assessee if any residential accommodation is owned by the assesses at any other place, which he is occupying, and the concessions in respect of self-occupied house are claimed by him for that property. In such a case, no deduction will be allowed in respect of the rent paid, even if the person does not own any residential accommodation at the place where he ordinarily resides.
Comparing the benefits under both the sections it is advisable to claim benefit u/s 10(13A) as maximum benefit is Rs.24,000 u/s 80GG which is obviously not acceptable in present condition if we compare rentals paid in city or even on outskirts where rent is more than Rs.2,000 per month. Still one can compare benefits under both sections and should avail maximum benefit.