HRA- What is House Rent Allowance, HRA Exemption & Deduction

The concept of House Rent Allowance (HRA) is relevant from the point of view of those taxpayers who are salaried employees. Income Tax Act, 1961 allows exemption in respect of House Rent Allowance. The provisions of HRA exemption are covered by section-10(13A) of the Income Tax Act and corresponding Rule-2A of Income Tax Rules. In this article, we will discuss in detail the various aspects related to HRA.

What is House Rent Allowance (HRA)?

House Rent Allowance (HRA) is in the nature of an allowance. It is a part of the salary component and is generally given by the employer to compensate the housing cost of the employee. Salaried individuals who live on rented premises can claim exemption towards HRA while income tax return filing. But it should be kept in mind that if you are living in owned/parental accommodation, you are not entitled to claim an exemption for HRA. In such a case, HRA will be fully taxable.

What are the conditions to be satisfied before claiming HRA?

• The assessee must be a salaried employee.
• He must have received a house rent allowance specifically from his employer to meet accommodation expenses in respect of the residential house occupied by him.
• He must not be the owner of the residential house which has been occupied by him for the purpose of residence.
• He must have actually incurred expenditure towards rent for such rented accommodation.

How much exemption is available towards HRA under Income Tax Act, 1961?

The quantum of exemption towards HRA is prescribed under Rule-2A of Income Tax Rules which is:-

Least of the following

(a) Actual amount of HRA received or
(b) Rent paid in excess of 10% of salary or
(c) 50% or 40% of the salary

Note:

• In case of metro cities of Mumbai, Delhi, Kolkata, Chennai:- 50% and in other cities:- 40% of salary
• Salary means Basic Salary + dearness allowance (if terms of employment so provide) + Commission based on sales
• If Commission is paid to an employee based on a fixed percentage of turnover achieved by that employee as a part of the contract of employment, such commission will be included in the ‘salary’ for calculation of HRA exemption - Gestetner Duplicators (P) Ltd. Vs. CIT (1979).
• Bonus will not be included in salary for calculation of HRA- CIT vs. B. Ghosal (1980).

Let’s take an example to understand the calculation of HRA:-

Mr. Akash resides in New Delhi and is in receipt of Rs. 540,000 as basic salary & Rs. 160,000 as dearness allowance in terms of employment. He also receives Rs. 148,000 as HRA. The rent paid by him during the year is Rs. 2, 10,000. Calculate the amount of exemption of HRA.

Solution:- The least of the following amount will be exempt:-

1. Actual HRA Received:- Rs. 148,000
2. Rent paid in excess of 10% of salary i.e. [210,000 – 10%(540,000 + 160,000)] = 140,000
3. 50% of salary i.e. 700,000 * 50% = Rs. 350,000

Thus, Akash will be entitled to HRA exemption for Rs. 140,000 and the remaining Rs. 8,000 will be taxable under the head of the salary.

Will the commission paid with reference to profit be included in the salary?

Yes, commission paid with reference to profit, it would partake the character of salary if it is a mode of remuneration for the services rendered by the employee- Raja Ram Kumar Bhargava vs. CIT (1963).

Can I claim the exemption for HRA if I am residing in my spouse/parent’s house?

If the house in which the employee resides is not owned by him and he pays rent for it, he can claim exemption within the parameters of section 10(13A) of the Act. The exemption is available even if the house is owned by a close relative (wife/husband/father/mother) and for which rent is paid on a regular basis. In such case, rent should be paid regularly on monthly basis through bank transfer entry- Bajrang Prasad Ramdharani vs. CIT [2013] 60 SOT 66 (Ahd.)

I own a residential house in Mumbai. I want to claim the exemption for HRA. Is it allowed under Income Tax Act to do so?

To avail exemption under section 10(13A), there is no requirement that the employee should not own a house. If an employee resides in a rented property, he can claim an exemption under section 10(13A) even if he owns a house in the same city or a different city.

Can I claim house rent allowance and housing loan exemption simultaneously in case the owned property and rented property are in the same city?

Yes, you can claim both the exemption of HRA u/s 10(13A) and Housing Loan Interest u/s 24 simultaneously in the ITR return. But you will have to prove that you had to stay in the rented property and incur rental expenditure for it. It might be possible because of the reason that the owned house property is occupied by your parents/close relative or it could not be utilized as your place of work is far away from such property.

Do I need to obtain the PAN of the landlord for HRA claim?

• As per Rule-26C, the employee shall furnish the name, address, and PAN of the landlord where the aggregate rent paid during the financial year exceeds Rs. 1 Lakh. Such particulars shall be furnished in Form No. 12BB.

I am paying rent to my landlord who is a non-resident. What are the legal provisions for such rent paid under Income Tax Act?

• TDS/Withholding Tax under section 195 shall have to be deducted where rent is paid to the non-resident landlord.
• Such deduction is compulsory even where the rent paid is less than Rs. 50,000 per month.
• TDS shall be deducted @ 31.20% on the entire amount of rent.
• Failure to deduct TDS can attract a penalty equal to tax not deducted under section 271C of the Income Tax Act.
• If the landlord wishes for a lower deduction of tax, the tenant can make an application to the ITO, International taxation u/s 195(2) of the Income-tax Act, or the landlord can make an application either by himself or through their authorized representative in India u/s 195(3) of the Act.
• It is compulsory for the tenant to file details in Part-A of Form No. 15CA online on Income tax Portal while paying rent each time. But where the annual rent is more than Rs. 5 Lakhs, the tenant needs to file details in Part-C of Form N0. 15CA after obtaining a certificate in Form No. 15CB from a Chartered Accountant.

My employer is not giving me any house rent allowance. Am I eligible for the exemption for house rent paid by me for my own residence?

Yes, you are entitled to claim a deduction for house rent paid by you under section 80GG of the Income Tax Act. For understanding the provisions of section 80GG, please refer to our article at the following link:- https://www.taxwink.com/blog/deduction-in-respect-of-house-rent-paid-under-section-80gg

If an individual has opted for the alternative tax regime under section 115BAC, exemption under section 10(13A) in respect of HRA is not available from the assessment year 2021-22.