Income Tax : -Deduction of House Rent Allowance u/s 10(13A)

House rent allowance (HRA) is received by the salaried class. A deduction is permissible under Section 10(13A) of the Income Tax Act, in accordance with Rule 2A of the Income Tax Rules. You can claim exemption on your HRA under the Income Tax Act if you stay in a rented house and get a HRA from your employer.

The HRA deduction is based on salary, HRA received, the actual rent paid and place of residence. The place of residence is important. For Mumbai, Kolkata, Delhi or Chennai, the tax exemption on HRA is 50 percent of the basic salary, while for other cities it is 40 percent of the basic salary.

The city of residence is to be considered for calculating HRA deduction.

The least value of these is allowed as tax exemption on HRA:

Actual rent allowance the employer provides as part of salary in the relevant period during which the rental accommodation was occupied Actual rent paid for the house, less 10 per cent of basic pay 50 percent of basic salary if you reside in Mumbai, Calcutta, Delhi or Chennai, or 40 per cent if you reside in other cities.

In order to claim the exemption, the rent must actually be paid for the rented premises which you occupy.

Also, the rented premises must not be owned by you. As long as the rented house is not owned by you, the exemption of HRA will be available up to the limits specified.

For the purpose of this deduction, salary means basic salary and includes dearness allowance, if the terms of employment provide it, and commission based on a fixed percentage of turnover achieved by the employee.

The deduction is available only for the period during which the rented house is occupied by the employee and not for any period after that. It is to be noted that the tax benefits for home loans and HRA are two separate aspects.

In case you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on a home loan.

You need to submit proof of rent paid through rent receipts, duly signed and stamped, along with other details such as the rented residence address, name of the owner, period of rent etc.

How it applies :-For example, assume one earns a basic salary of Rs 20,000 per month and rents a flat in Mumbai for Rs 5,000 per month. His actual HRA is Rs 8,000. He is eligible for 50 percent of the basic pay for HRA exemption.

Least of:

    1. Actual HRA received – Rs 8,000

    2. 50 percent of basic salary – Rs 10,000

    3. Excess of rent paid over 10 percent of salary, i.e., Rs 5,000 less Rs 2,000 – Rs 3,000.

As such, Rs 3,000 per month is the least and will be the exemption allowable for HRA deductio

Salary :- Deduction of HRA as per New Rule

Deduction of HRA is main tool for getting deduction from Salary for salaried person.  Earlier generally, employee get this deduction on submission of Rent Receipt paid by him to his/her employee. But now CBDT has made mandatory to provide PAN number of his/her landlord to whom he / she has paid rent in excess of Rs. 1,00,000.00 (one lac) per annum to his / her employee.  In case non availability of PAN with Land Lord, a declaration to this effect from the landlord alongwith the name and address of property should be filed by the employee. 

Some important question answers are given below for more clarity :-

Q. What is objective to claim 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 condition to claim exemption?

A.  An employee must fulfill following conditions to avail exemption:-

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)

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 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.

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

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

Q. What does mean by salary 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 employee stayed in two places during the financial year?

A.  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.

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

A.  Whole of the HRA amount received will be taxable.

Q.  If place of stay is different from 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 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 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 employee stay at parent house, can he claim exemption for HRA?

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

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

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

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

A.  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.

Q.  Whether exemption of HRA is 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 Home loan both together?

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

Resource:-

(i) Section 10(13A) read with Rule 2A of the Income Tax Act,1961

(ii) Circular : No. 90 [F. No. 275/79/72-ITJ], dated 26-6-1972 by CBDT

(iii) Letter : F. No. 12/19/64- IT(A-I), dated 2-1-1967 By CBDT

(iv) Circular : No. 9/2003, dated 18-11-2003/[Para 5.2-(9)].

(v) CIRCULAR NO : 08 /2013 dated 10th Oct 2013