How to claim exemption of House Rent Allowance (HRA) under Income Tax Act

  •         What is “House Rent Allowance” (HRA)?

The HRA is the allowance given by employer to employee for meeting the expenses of housing rent, when such an employee is residing at the rented premise during the course of his employment, and paying rent for that house.

  •         Let’s know the tax treatment of HRA?

The HRA is taxable under the head “Income from Salary”. The taxable HRA is ‘HRA received by the employee during the year’ Less ‘Exemption u/s 10(13A)’:

The exemption in respect of house rent allowance u/s 10(13A) is least of following three:

An amount equal to 50 per cent of salary, where residential house is situated in Mumbai, Calcutta, Delhi or Madras OR an amount equal to 40 per cent of salary where residential house is situated at any other place.

HRA received by employee in respect of the period during which rental accommodation is occupied by the employee during the year.

Rent paid Less 10 per cent of salary.

Important Point:

 What is “salary”?

“Salary” (for the purpose of calculating HRA exemption) means basic salary and includes dearness allowance if terms of employment so provide. [In other words dearness allowance shall be considered only when it is part of salary for computing all retirement benefits (like provident fund, pension, leave encashment, gratuity, etc.)]. Salary also includes commission based on the fixed percentage of turnover achieved by an employee as per terms of contract of employment. But it does not include any other allowance and perquisite.

  Salary shall be determined on “due” basis:

Basic salary, 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 year. Thus, it follows that salary of a period, other than the concerned year, is not considered even though such amount is received during the concerned year. Further, salary of the period during which rented accommodation is not occupied in the year, is not considered of aforesaid computations. For example, if employee received the HRA for whole year, but he stays in rented house only for Jan to March then salary of Jan to March is considered for calculation of HRA exemption.

  •         What is the mode of computation of exemption?

The amount of exemption in respect of HRA received by an employee depends upon the following:

a.      “Salary” of the employee;

b.     House Rent Allowance;

c.      Rent paid; and

d.     The place where the house is taken on rent.

When these four are same throughout the year, the exemption should be calculated on “annual” basis. However, when there is a change in respect of any of the aforesaid factors, then the exemption shall be worked out on “monthly” basis.

Following example will help you to get the clear idea of how the ‘Taxable HRA’ is to be calculated.

Mr. Tarun is an employee of a company. During the Financial year 2014-15, he gets Rs. 85,000 per month as salary and Rs. 15,000 per month as dearness allowance (which is considered for calculating all retirement benefits). He gets Rs. 60,000 per month as house rent allowance. Mr. Tarun resides with his joint family up to July 31, 2014 for which no rent is paid. From August 1, 2014, he takes a house on rent (monthly rent being Rs. 12,000) at Amritsar. However, he shifts to Mumbai with effect from January 1, 2015 (monthly rent being Rs. 55,000). Find out the house rent allowance chargeable to tax for the financial year 2014-15.

Solution:

In this example, as there is change in “Salary” of the employee, rent paid, and the place where the house is taken on rent on which the exemption in respect of HRA depends, the exemption shall be calculated on ‘monthly’ basis as follows:

“Salary” for the purpose of computing house rent allowance exemption shall be Rs. 1,00,000 per month (Rs. 85,000 + 15,000  being dearness allowance which is considered for calculating all retirement benefits.)

Exemption is calculated as follows:

  From April 1, 2014 to July 31, 2014:

During this period, Mr. Tarun does not pay any rent. Consequently, no exemption is available up to July 31, 2014.

  From August 1, 2014 to December 31, 2014:

During this period, he resides in a rented accommodation at Amritsar. House rent allowance exemption shall be determined as follows:

The least of the following three is exempt:

a.      Rs. 40,000 per month (being 40% of salary of Rs. 1,00,000);

b.     Rs. 60,000 per month (being house rent allowance); or

c.      Rs. 2,000 per month (being Rent Paid i.e. Rs 12, 000 Less 10% of Salary i.e. Rs.10,000),

Minimum of above three is Rs.2000, thus, during this period, Rs. 2,000 per month will be exempt.

  From January 1, 2015 to March 31, 2015:

During this period, he resides in a rented accommodation at Mumbai. House rent allowance exemption shall be determined as follows:

Least of the following is exempt:

a.      Rs. 50,000 per month (being 50% of salary of Rs. 1,00,000);

b.      Rs. 60,000 per month (being house rent allowance); or

c.       Rs. 45,000 per month (being Rent Paid Rs.55,000 Less 10% of Salary i.e. Rs.10000),

Thus, during this period, Rs. 45,000 per month will be exempt.

Thus taxable portion of HRA shall be determined as follows:

House Rent Allowance (Rs. 60,000 x 12) Rs.7,20,000
Less: Exemption- Under section 10 (13A)  
From August 1, 2014 to December 31, 2014 (Rs. 2,000 x 5 months) Rs.10,000
From January 1, 2015 to March 31, 2015 (Rs. 45,000 x 3 months) Rs.1,35,000
Taxable House Rent Allowance Rs.5,75,000

 

  •          When the exemption is not available?

Exemption is denied where an employee lives in his own house, or in a house for which he does not pay any rent or pays rent which does not exceed 10 per cent of salary.

  •          Whether anyone is required to submit the proof for HRA claim?

The parson is required to submit proof of rent paid through rent receipts, one for the beginning of the year and one towards the end of the financial year. Other details such as the rented residence address, rent paid, and name of the person who rents it are also required to be submitted to the employer.

  •          Can anyone simultaneously avail tax benefits on his home loan and HRA?

Yes, when anyone is paying rent for an accommodation, he can claim tax benefits on the HRA, still he can also avail tax benefits on his home loan. This is possible, if his own house is rented out or he works from another city etc.

  •          Can anyone is able to take HRA exemption, if he is living in his own house?

No. HRA exemption is not available to anyone who lives in his own house or does not incur any expenditure on payment of rent, and the entire amount of HRA received is liable to tax.

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