House Rent Allowance – Taxability & Exemption

Hello everyone, hope you all are doing well. First I would like to wish you all “Happy New Year”, may you all have a wonderful year ahead. In my today’s article I will discuss about the House Rent allowance (HRA). Now the catch here is that you an employee might trust your employer for allowing you the HRA, but at the same time you should know the right way of treatment of HRA in your Income Statement while you are filing your Income Tax Return. A smart individual is the one who is not banking on this Chartered accountant but surely the one who at least having the knowledge of the transactions occurring during the year in his income statement.

Introduction:

HRA is given to meet the cost of a rented house taken by the employee for his stay. This is a part of the salary. HRA is given by the employer due to generally accepted Business practice.

Taxability & Exemption:

HRA is an allowance and is subject to income tax. HRA received from the employer is taxable under head “Income from Salaries”. However Income Tax Act, 1961 allows for exemption in respect of the HRA paid to employees. The exemption on HRA is covered under Section 10(13A) of the Income Tax Act, 1961 and Rule 2A of the Income Tax Rules. It is to be noted that the entire HRA is not deductible.

Conditions to claim Exemption:

• An employee can claim exemption under the Income Tax Act if he stays in a rented house and is in receipt of HRA from his employer.
• Employee must actually pay rent for the house which he occupies.
• The rented premises must not be owned by him. In case one stays in an own house, nothing is exempt u/s 10(13A).
  

What are the dependent factors in calculating HRA for the salaried individual?

Exemption of HRA is based on following factors

• HRA Received;
• Rent Paid;
• Salary; &
• Place of Residence (Metro Vs. Non-Metro)

If these aspects remain constant through the year, then tax exemption is calculated as a whole annually, if this is subject to change, as in a rent hike, pay hike or shift in residence etc., then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.

The place of residence is significant in HRA calculation as for a metro the tax exemption for HRA is 50% of the basic salary while for non-metros it is 40% of the basic salary. This holds true especially when you work at a metro and reside at a non-metro. In this case, your city of residence only will be considered for calculating your HRA.

Quantum of Exemption:

As long as the rented house is not owned by the assessee, the exemption of HRA will be available up to the the minimum of the following three options:

• Actual house rent allowance (HRA) received from your employer
• Actual house rent paid by you minus 10% of your salary
• 50% of your salary if you live in a metro (i.e. Mumbai, Delhi, Chennai & Kolkata) or 40% of your salary if you live in a non-metro

Least of above will be exempt.

Note: The exemption will be available only for the period during which the rented house is occupied by the employee and not for any period after that.

Meaning of Salary for calculation the exemption of HRA:

• Salary means (Basic + D.A + Commission based on fixed percentage on turnover).

Note: Salary is to be taken on due basis in respect of the period during which the period accommodation is occupied by the employee in the previous year.

Example:

Now let’s understand the entire concept with the help of Example:

Mr. Abhishek (working at Hyderabad) has received following amount during the previous year 2013-14.

(1)   Basic Salary – Rs. (10,000*12) – Rs. 1,20,000/-

(2)   Dearness Allowance (D.A) – Rs. (2,000*12) – Rs. 24,000/-

(3)   House Rent Allowance (H.R.A.) – Rs. (5,000*12) – Rs. 60,000/-

(4)   Actual Rent Paid – Rs.(4,000*12) – Rs. 48,000/-

The minimum of the following amount shall be exempt

 ⇒ Actual HRA received (5,000*12) – Rs. 60,000/-

⇒ Rent Paid in excess of 10% of salary ( 48,000-14,400) – Rs. 33,600

⇒ 40% of Salary – Rs. 57,600/-

Therefore, Rs. 33,600 shall be exempt and the balance Rs. 26,400 shall be included in gross salary.

Frequently Asked Questions:-

How is HRA accounted for in the case of a salaried individual and a self-employed professional?

HRA (house rent allowance) is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. On the other hand, self-employed professionals cannot be considered for HRA exemption under this act, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.

Can I pay rent to my parents or spouse to avail HRA benefits?

You can pay rent to your parents, however, they need to account for the same under ‘Income from other sources’ and will be entitled to pay tax for the same.

On the other hand, you cannot pay rent to your spouse. In view of the relationship when you take up residence together, you 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.

Do I need to submit any proof for my HRA claim?

You need to submit proof of rent paid through rent receipts, for which only two need to be submitted, one for the beginning of the year and one towards the end of the financial year. It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it etc.

Can I simultaneously avail tax benefits on my home loan and HRA?

The tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other. As long as 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 your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under income from other sources.

The Finance (No. 2) Bill 2014 is introduced in the Lok Sabha today, 10.07.2014, together with the Memorandum explaining the provisions of the Bill. The Major Provisions of the Finance Bill in respect of Direct Tax is as below:- 1. Personal Income-tax exemption limit raised by Rs. 50,000/- that is, from Rs. 2 lakh to Rs. 2.5 lakh in the case of individual taxpayers, below the age of 60 years. Exemption limit raised from Rs. 2.5 lakh to Rs. 3 lakh in the case of senior citizens. This is very good initiative by the NDA Govt. since public is already suffering from the Inflation, so I think this will provide some relaxation to Middle class persons. 2. It will be more satisfactory step by the Finance Minister if he changes the Surcharge to 0% in case of individual. However there is no change in the rate of surcharge either for the corporates or the individuals, HUFs, firms etc. 3. The education cess to continue at 3 percent. 4. Investment limit under section 80C of the Income-tax Act raised from Rs. 1 lakh to Rs. 1.5 lakh which is in line with the increase in the Limit of Deposits under PPF account. Further it will provide some more benefit to the Middle class persons by saving additional 5000Rs. It is to be noted that sec. 80CCE is also amended to make it in line with sec. 80C. 5. Deduction limit on account of interest on loan in respect of self occupied house property raised from Rs.1.5 lakh to Rs.2 lakh. This is move of Finance minister to encourage the real estate business. It may be noted that a deduction of 1lac Rs. u/s80EE will be continued to be available to the assessee. 6. Investment allowance at the rate of 15 percent to a manufacturing company that invests more than Rs. 25 crore in any year in new plant and machinery. The benefit to be available for three years i.e. for investments upto 31.03.2017. 7. It was a point of litigation that what is the meaning of the “a residential house” u/s 54(1)? But now in section 54 of the Income-tax Act, in sub-section (1), for the words “constructed, a residential house”, the words “constructed, one residential house in India” shall be substituted with effect from the 1st day of April, 2015. Similar Amendment is also made u/s 54F. 8. From a long time it was in practice that if the assessee receives any Advance for sale of any capital assets and then he is not able to sell it, then such amount is to be deducted from the Cost of Assets while calculating the Indexed Cost of Acquisition. However now In section 56 of the Income-tax Act, in sub-section (2), after clause (viii), the following clause shall be inserted with effect from the 1st day of April, 2015, namely:— “(ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,–– (a)  Such sum is forfeited; and (b)  The negotiations do not result in transfer of such capital asset.” So it is very clear that such amount is taxable under “Other Sources Head. 9. In section 269SS of the Income-tax Act, in the opening portion, after the words “cheque or account payee bank draft”, the words “or use of electronic clearing system through a bank account” shall be inserted with effect from the 1st day of April, 2015. Similar amendment is also made u/s 269T. 10. To ensure the growth of Slurry Pipelines business & Transportation of Iron ore, Finance minister have extended the investment linked deduction to two new sectors, namely, slurry pipelines for the transportation of iron ore, and semi-conductor wafer fabrication manufacturing units. 11. Power sector is also considered while making the budget and 10 year tax holiday extended to the undertakings which begin generation, distribution and transmission of power by 31.03.2017. 12. A new Chapter-XII-FA is inserted for the Provisions of the Business. 13. Income arising to foreign portfolio investors from transaction in securities to be treated as capital gains. 14. The eligible date of borrowing in foreign currency extended from 30.06.2015 to 30.06.2017 for a concessional tax rate of 5 percent on interest payments. Tax incentive extended to all types of bonds instead of only infrastructure bonds. 15. To make transfer pricing provisions more easy & practical, Finance Minister has allowed use of multiple year data for comparability analysis under transfer pricing regulations. 16. To remove tax arbitrage, rate of tax on long term capital gains increased from 10 percent to 20 percent on transfer of units of Mutual Funds, other than equity oriented funds. 17. It is clarified by the Finance Minister that income and dividend distribution tax to be levied on gross amount instead of amount paid net of taxes. 18. In case of non deduction of tax on payments, 30% of such payments will be disallowed instead of 100 percent. It’s a very good initiative by the Finance Minister since there are already many provisions for penalty & prosecution in case of Non-deduction or Short Deduction of TDS. New provision will provide a major relief to the Corporates. 19. 60 more Ayakar Seva Kendras to be opened during the current financial year to promote excellence in service delivery. 20. Net Effect of the direct tax proposals to result in revenue loss of Rs.22,200 crore. There are some more amendments but I have not considered them here. With this we can see that there are many good news and many bed news also for the general public but overall it can be said that Hon’ble Finance Minister have come up with so many gifts to the “Aam Aadmi” and we hope that proposed amendments will be beneficial for a common man both in terms of “Compliance of Law” and “Saving in Taxes”.