HRA (house rent allowance) means is the amount paid by the employer to employee for the rent of the resident house of employee it is a part of salaries. The decision of how much to pay HRA is depends on the employer. The amount of such HRA is deductible under section 10(13A). The amount of deduction allowed under this provision is least of the following:

  • HRA received
  • 40%/50% of salary (Based on place you reside)
  • Actual rent paid less 10% salary

 

Points to be considered:

  • The person claiming HRA must be a salaried person.
  • He must have rented a house during the year for which he is claiming HRA.
  • The person must have actually paid the rent if he is claiming for HRA.
  • 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.
  • Salary includes: Basic salary + D.A (dearness allowance) + fixed commission based on Turnover/sales.
  • The HRA is also depends on where you are staying whether in Metro or village. If the employee is staying in village then he must claim HRA at the rate of 40% of salary whereas if he is staying in Metro then he must claim HRA at the rate of 50% of salary.
  • HRA cannot be claimed if rent paid is less than 10% of the salary.

 

How to Calculate HRA?

 

To understand how to calculate HRA let us return to the example of Ravi Varma. He stays in Mumbai and pays Rs.8000 per month as rent. His pay slip is as below:

 

Employee No – XXXXXX

Amount (Rs)

Basic

40000

HRA

10000

Conveyance

2500

LTA

5000

Total Earnings

72500

 

For calculating Ravi’s HRA that is exempt from income tax we have:

 

Salary - Rs. 40,000 per month (the basic salary will be considered in this case since there is no commission or dearness allowance) HRA provided by company – Rs. 8,000 per month 10% of basic salary (10% of annual basic salary) – Rs. 48,000

Now we calculate the three scenarios:

  • Amount received as HRA from employer = Rs. 10,000 X 12(months) = Rs. 1,00,000
  • Actual rent paid less 10% of basic = (Rs. 8,000 X 12) – Rs. 48,000 = Rs. 48,000
  • 50% of basic salary since he lives in a metro = Rs. 2,40,000

In the case of Ravi, it is evident that the HRA amount which will be exempt from tax will be Rs. 48,000 because that is the amount that is the least of the three scenarios.

 

Below are some FAQs which will help you understand the scenario more properly:

 

1) Who can claim HRA?

 

Everyone cannot claim HRA. HRA is allowed to those people who are living in a rented accommodation. It is applicable to salaried persons. Self-employed assessees and also assessees having their own house are not eligible for claiming HRA.

 

2) What are the factors on which HRA is dependent?

 

HRA is depended on four factors i.e. salary, HRA received, actual rent paid and where you reside i.e. whether metro or non-metro.

 

3) Can I pay rent to my parents to avail HRA benefits?

Yes, you can avail benefits of HRA if you pay the rent to your parents. But, at the same time your parents must have accounted it in their taxable income for the year. 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 the income tax laws. Such transactions can only spell trouble under scrutiny, so avoid doing these.

 

4) What proof need to be submitted for claiming HRA?

If you’re monthly HRA is less than 3000 then you need not required to submit any proof.

But, in case you’re monthly HRA is > than 3000 and rent is <=8333 then you must submit the following to your company:

  • Original rent receipt of the beginning and end of the year. Please Note that any rent revision during the year would need to be supported with a fresh receipt.
  • A copy of lease agreement in absence of lease agreement, rent receipt should contain the Cheque / EFT details and additional supporting document like bank statement extract to be provided.

 

If in case you’re monthly HRA is > than Rs.3000 and rent is greater than Rs.8333 then you must submit the following to your company:

  • Original rent receipt of the beginning and end of the year. Please Note that any rent revision during the year would need to be supported with a fresh receipt.
  • A copy of lease agreement in absence of lease agreement, rent receipt should contain the Cheque / EFT details and additional supporting document like bank statement extract to be provided.
  • PAN of the land lord/ declaration if he/she does not have a PAN.

 

Bare Act portion of the provision:

Section 10(13A)

any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed38 having regard to the area or place in which such accommodation is situate and other relevant considerations.

Explanation.—for the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—

(a) The residential accommodation occupied by the assessee is owned by him; or

(b)The assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him;

 

Rule 2A prescribes the quantum of exemption available, which will be the least of the following:

Bombay/Calcutta/Delhi/Madras

Other Cities

■  Allowance actually received

■ Allowance actually received

■  Rent paid in excess of 10% of salary

■ Rent paid in excess of 10% of salary

■  50 per cent of salary

■ 40 per cent of salary

 

'Salary' for this purpose includes basic salary as well as dearness allowance if the terms of employment so provide. It also includes commission based on a fixed percentage of turnover achieved by an employee as per terms of contract of employment but excludes all other allowances and perquisites. In view of Explanation (ii) to rule 2A, basic pay, dearness allowance and commission are determined on 'due' basis in respect of the period during which rental accommodation is occupied by the employee in the previous year. Thus, emoluments of a period other than previous year are not to be considered, even though such amount is received (as well as taxed) during the previous year. Again, emoluments of the period during which rental accommodation is not occupied in the previous year are left out of computation. It is important to note that where rent paid is 10 per cent or less than 10 per cent of salary, no exemption will be admissible. Again exemption is denied where an employee lives in his own house, or in a house for which he does not pay rent.

For any query you can write to Chirag@cachauhan.in  before making any decisions do consult your Professional / tax advisor. For misrepresentation or interpretation of act or rules Author does not take any responsibility. Neither the author nor the firm accepts any liability for the loss or damage of any kind arising out of information in this document or for any action taken in reliance there on.

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