Audience: Indian TaxPayers
Purpose: Understanding the provisions and implications of House Rent Allowance
Source: The Economic Times, New Delhi, February 21 2007
Nature of Blog: Abridged version of the orginal article
Reason for documentation: These are my important notes that help me in Financial Planning. If anyone wants to read for information or knowledge, he/she is most welcome to do so either from this blog here, or from the archives of original source.
The exemption applicable to house rent allowance (HRA) is covered under Section 10 (13A) of the Income-Tax Act. Normally it is part of the salary package over and above the basic salary and dearness allowance (if any). And, HRA is given irrespective of the end use of funds. Now, whether or not one gets excemption on the HRA is subject to various conditions.
The foremost condition for claiming exemption on HRA are - you must pay rent for the rented premises which you occupy, but you must not own the rented premises and that the rent should be more than 1o% of your income.
How is the tax exempt amount calculated?
The I-T Act describes the process by which the amount exempt from tax is to be calculated. As per the relevant provision, the least of the following is exempt - house rent allowance received; rent paid less 10% of salary and 40% of salary (50% in case of Mumbai, Chennai, Kolkata and Delhi). Salary here means bonus + dearness allowance(DA) where provided by the terms of employment.
Usually, private sector employers do not pat DA to employees. "Most companies keep HRA as 40% or 50% of the basic salary of their employees to make the salary structure efficient", as said by Adroit Services, Pune.
For e.g. -
If you earn a salary of INR 40K, and the house rent allowance is INR 20K (50% of your salary). Let us assume that you pay a rent of INR 15K for an accomodation at Mumbai. In such a case, the amount of rent paid minus 10% of the salary works out to INR 11K, while 50% of the salary is 20K. The least amount as per the Income Tax provisions is INR 11K. => This is the amount that is exempt from Tax, the balance amount of INR 4K will be taxed.
When can you claim exemption?
You can claim rent given to parents if you live with them. This,technically, makes your parents the landlords. Then, one of your parents' should declare it in his/her personal income-tax return to prevent litigation in the future. However, you cannot claim rent paid to spouse, because the relationship of husband and wife is legally not declared as of commercial nature, whereby they are supposed to live together.
Documents needed -
Employers follow varied policies regarding the documents they collect. Some insist for rent agreement and bank statement extract while some just ask for plain receipt.
The general practice is that corporate require employees to show the rent agreement and the rent receipts with a revenue stamp affixed on the receipts and the signature of the landlord crossing the revenue stamp. Although you have to produce rent receipts for claiming deduction under Section 10 (13A), salaried employees drawing house rent allowance up to INR 3000 per month are exempted from production of rent receipts.
However, this concession is only for the purpose of tex deduction at source, and in the regular assessment of the employee, the assessing officer can make enquiries. If you receive HRA for the period during which you were not occupying a rental accomodation then you would not earn exemption.
Some companies insist on additional information and disclosures such as landlord's PAN number though this is not mandated by the income-tax department. In such cases, employees have the option to claim HRA exemption at the time of filing tax returns if the landlord is not prepared to give his PAN number.
Home Loan and HRA Benefits
Q. Can i get a cliam exemption on HRA and also claim deduction on account of Housing Loan Interest and principle at the same time?
Ans: Yes this is possible, however under certain conditions:
a) If you took a home loan to buy a house in Mumbai, but you reside in Bengaluru for some reason, you can get a tax benefit on principal repayment, as well as interest repayment (under Section 24 HRA benefits 10 (13A)). Thus, if the rented accomodation and the owned houses are in different cities, this indeed is possible.
b) Suppose you have bought a house in the same city but you are staying in a rented accomodtaion because your owned house is not yet ready for possession, you may still be entitled to HRA benefits.
c) It may happen that your house and work place are in the same city, but you still take a rented accomodation because your house is distant from your office. In such a case, you can still avail of HRA deduction under Section 10(13A). A tax rebate upto INR 1,50,000 under Section 24 on home loan interest and a tax relief upto INR 100K under Section 80C can also be awailed.
d) If you took a house loan, got possession of the house, have rented it out and stay in a rented accomodation, you will be entitled to all the tax benefits mentioned above. However, the rent you earn on your house would be taxable.
e) It may not be possible to claim HRA exemption, if both the houses are in the same locality. Your home must be at a considerable distance for you to stay elsewhere and claim HRA exemption. If your house and the rented accomodation is in the same vicinity the HRA benefit would stop once your house is ready for possession.
Milan
00:28 am GMT
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