HRA Exemption

House Rent Allowance(HRA) [Section 10(13A)]:

An allowance to meet the expenses in connection with the rent of the house. HRA is a special allowance specifically granted to an employee by his employer towards payment of rent for his residence.

Calculation of HRA Exemption

The House Rent Allowance is exempted under section 10(13A) Income Tax Act, 1961. HRA Exemption is available for the least of the following amounts:

1. Actual HRA amount received from the employer.
2. The amount of rent paid by the assessee in excess of 10% of his/her basic pay. (Basic Salary + D.A)
3. 50% of the basic pay (Basic Salary + D.A), if resides in metro city and 40% of basic pay (Basic Salary+ D.A), if resides in other than in metro city.

Exemption u/s 10(13A) is not available under the default tax regime u/s 115BAC.

Exemption is not available to an assessee who lives in his own house, or in a house for which he has not incurred the expenditure of rent.

“Salary” for this purpose means basic salary, dearness allowance, if provided in terms of employment and commission as a fixed percentage of turnover.

Relevant period means the period during which the said accommodation was occupied by the assessee during the previous year.

HRA received                                                                                               Rs. 1,80,000/-

Less: Exempt under section 10(13A)                                                        Rs. 1,36,800/-

Taxable HRA                                                                                                 Rs. 43,200/-

HRA Calculation:

Exemption shall be least of the following three limits:

(a) the actual amount received (Rs. 15,000 × 12) = Rs.1,80,000

(b) excess of the actual rent paid by the assessee over 10% of his salary = Rent Paid (-) 10% of salary for the relevant period = (Rs. 16,000×12) (-) 10% of [(Rs. 40,000+Rs.6,000) × 12] = Rs. 1,92,000 – Rs. 55,200 = Rs. 1,36,800

(c) 40% salary as his accommodation is situated at Kerela = 40% of [(Rs. 40,000+ Rs. 6,000) × 12] = Rs. 2,20,800/-

Note: For the purpose of exemption under section 10(13A), salary includes dearness allowance only when the terms of employment so provide, but excludes all other allowances and perquisites

Conditions to be satisfied for Claiming HRA:

• The employee must stay in a rented house during the period for which the exemption is being claimed and must have actually incurred the expenditure of rent.
• For computing the HRA exemption , Salary means ‘ Basic Salary , Dearness Allowance, if the terms of employment so provide and commission based on fixed percentage of turnover achieved by the employee.
• The employee will have to submit rent receipt / rent agreement to the employer for availing the HRA Exemption. The employer needs to only obtain a rent receipt/ rent agreement from the employee; however, the employer is not required to verify the receipt for granting the exemption to the employee.
• If the amount of rent claimed by the employee is more than Rs.1,00,000 per year, then the Permanent Account Number (PAN) of landlord has to be disclosed.  If the landlord does not have PAN, the employee is required to submit a declaration to this effect from landlord along with the name and address of the landlord.

• Income Tax Act, provides that an employee can claim the HRA exemption even if he owns a house but stays in a rented accommodation. However, to claim this exemption the employee should own a house in some other city apart from the city where he works.

• If an employee has taken a loan from a bank or a housing finance company to buy the house, he can avail the deduction of interest under Section 24 of the Income Tax Act as well as repayment of principal towards loan under Section 80C of the Act, even if one is claiming the HRA exemption while staying in a rented accommodation in another city.

• The rent receipt should have a one rupee revenue stamp with the signature of the person who has received the rent and other details such as the rented residence address, rent paid, and name of the person who has paid the rent. While HRA is a major tool to save tax, it is equally important to keep every documentation properly, in case demanded by the tax authority.

Points to be remembered:

1. Self-employed professionals cannot claim the HRA exemption under Section 10(13A) of the Income Tax Act, 1961, as they do not earn a salary.
2. While one can pay rent to parents to claim the HRA exemption, they need to pay tax on the rent received.
3. Exemption u/s 10(13A) would be available to an assessee only if he exercises the option of shifting out of the default tax regime provided u/s 115BAC(1A). It is not available under the default tax regime u/s 115BAC