HRA a Tool of Tax Planning: Queries

House Rent Allowance - A tool of Tax planning for employees

House Rent Allowance (HRA) is second component which is found in each pay slip after basic salary.  This is the major contributor in tax relief for the employee who reside in rented house during his/her employment.

Generally employee submits Rent receipt and rent deed to his employer to claim exemption of tax on account of HRA however recently CBDT vide circular :08/2013 dated 10 Oct 2013 has made mandatory that If annual rent paid by the employee to his/her land lord exceeds Rs 1,00,000 per annum, he/she will have to report PAN of the landlord to the employer. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.

Apart from this new requirement, there are so many doubts & questions arise while calculating & claiming exemption of tax from HRA which I am trying to summaries here in “question-answer form” in my following lines:-

·         What is objective to claim exemption for House Rent Allowance?

To meet expenditure actually incurred by an employee on account of payment of rent in respect of residential accommodation.

·         Which section HRA exemption has been granted?

Section 10(13A) of the Income Tax Act,1961 provides for the exemption from HRA.

·         What are condition to claim exemption?

An employee must fulfill following conditions to avail exemption:-

1.   He/she must stay in rented House during the period for which claiming exemption i.e. he/she does not stay in own house (property in his/her name)

2.   He/she must have actually incurred expenditure for payment of rent.

·         How shall exemption from HRA be calculated?

Calculation of HRA exemption is regulated by the Rule 2A of the Income tax Rules, 1962 which says that minimum amount of the following three shall be exempt :-

(a)    Actual amount of HRA received,

(b)    Rent actually paid minus 10% of salary

(c)     50% of salary if stayed in Delhi/Mumbai/Chennai/Kolkata or 40% of salary if stayed in other place.

·         If HRA received during the Financial year is more than the least of amount calculated, what would be consequence?

Excess amount shall be taxable and be treated as part of gross salary.

·         What does mean by salary for the calculation of HRA exemption?

It includes three components (i) Basic Salary, (ii)DA if considered for Retirement purposes and (iii)Commission forming part of Salary as a Fixed Percentage of Turnover achieved by the employee.

·         What will happen if employee stayed in two places during the financial year?

If he stays in two different places in same city, nothing will change however if he stay in different cities, it may affect if staying in Delhi/Mumbai/Chennai/Kolkat for one period and in other place for other period. 

·         What will happen if employee pays rent less than 10% of his salary?

Whole of the HRA amount received will be taxable.

·         If place of stay is different from place of employment, how HRA exemption shall be calculated?

The exemption must be calculated on the basis of the place where residential accommodation is situated because HRA exemption is for expenditure actually incurred for Rent even in relation the employment.

·         HRA exemption should be calculated on monthly basis or for whole of the year?

Exemption is for the period in which rental expenditure actually incurred and rental accommodation is occupied by the employee during the financial year therefore if there is no change in place or rent paid during the year, it can be calculated for whole year but if there is a change in any of the two during the year then it must be calculated on monthly basis and for the month in which rental accommodation occupied by the employee.

Further calculation of HRA exemption depends upon Salary or HRA actually received also thus if there is any change in salary or HRA amount in the period it must be calculated separately for that period.

·         If employee stay at parent house, can he claim exemption for HRA?

Yes, if he paid the rent actually to his parent.

·         If parents are Senior Citizen ( reader wants to say that when rent is paid to parent ) and don't file ITR then in that case what would be done?

If parent have PAN they can furnish it or may furnish declaration for not having PAN and employee will get exemption through employer. There is no need to file ITR by parent if their total income does not exceed the maximum taxable limit.

·         My HRA component is Rs. 10,000/- per month and I stay with parents in a rented house and rent is borne by my father. If I have to show as if I am paying rent to my father, do we need a separate agreement for that ?.

And if only Rs. 1,00,000/- for the entire year can be claimed, is it possible for us to claim Rs. 10,000/- per month up to September end and thereafter keeping the above rule in view, since earlier the limit used to be Rs. 14,999/- per month. Please guide.

As you stay with your father and he himself staying in rented house , I would not suggest to pay rent to father.

One more thing I want to make clear that threshold limit of Rs.100000/- is not for claiming exemption but it is limit where your employer will insist you to furnish PAN of landlord and in case of non furnishing he will deduct more TDS. second this threshold limit would be applicable w.e.f 1st April 2013 as circular has been issued for FY 2013-14 thus no need to bifurcate rent into two periods.

·         Suppose my parents have own registered flat in their joint names and full
payment has been made by father. Can rent be paid to mother considering there is nothing contributed from his account into the flat.

Even house is in joint name but see who is the real owner. I understand that it is your father who actually bore the cost. we must consider the concept of “substance over form”. That’s why I believe that father should be treated as owner. It is not advisable to pay full rent to mother only, it may lead litigation.

·         What will happen if employee is paying rent to his/her spouse?

Relationship of husband-wife is not supposed to be commercial therefore it is better that no exemption should be claimed in such transaction.

·         If relationship of husband wife is not supposed to be commercial then do relationship with parents is supposed commercial? One of reader raised this objection.

It’s true that in family it is not supposed to have commercial relations but when law creates some such fictions (for example HUFs, ) transactions between such entities may be commercial. Recently in one of case by ITAT ahemdabad , even rent paid to wife has also been allowed but still it is my understanding that such tax planning should not be promoted because it may lead litigation and it is ITAT decision also which will not have jurisdiction in other AO.

·         Do employee need to submit any proof for payment of rent to claim HRA exemption?

Payment of actual rent is pre requisite for claiming HRA exemption and Assessing Authority may ask for proof of payment at the time of regular assessment but employee drawing HRA upto Rs.3000/- per month shall be exempted from production of rent receipt while submitting his claim to employer. 

·         Whether exemption of HRA is part deduction allowed u/s 80C?

No, HRA exemption is different from deduction u/s 80C and it does not be included in the amount eligible for deduction u/s 80C.

·         Can an employee avail tax benefit of HRA and Home loan both together?

Yes, Tax treatment of both is under different sections and both can be availed simultaneously.

·         What will be the scenario if any land lord denies giving pan in normal case too??

Employer will deduct more TDS and then employee will have to file for refund by
 claiming exemption while filing his ITR for the relevant year.

·         I would like to know from when is Circular No : 08/2013 dated 10th Oct 2013 applicable.

This Circular No : 08/2013 dated 10th Oct 2013 is related to TDS on Salary and applicable for FY 2013-14 (AY 2014-15) thus it is applicable for the transaction happened from 1st April 2013 to 31st March 2014. i.e. applicable from 1.4.2013

·         What if when employer has not given exemption benefit of HRA since employee was not able to produce Rent slip. and tax was deducted by employer. Can employee claim exemption of HRA and claim refund?

Exemption may be claimed while filing your ITR as circular is related to TDS to be deducted by employer. No circular can override the relief given by the law itself. yes you can claim refund.

• If wife & husband are joint owners of home and both names appear in rent agreement as owners then is it sufficient to produce PAN of only wife to the employer ?

According to Circular PAN of landlord is required and I understand that it would be sufficient to furnish PAN of one of landlord if definite share of landlords not mentioned in deed.
Further motive behind circular is to expand network on “actual rent incurred & HRA claimed by the employee” and restricting bogus claim on HRA that’s why also it would be sufficient if PAN of one landlord is furnished.

• Let me know that this means limit has been reduced from 180000 p.a. to 100000 p.a., and if our company hired a accommodation for staff with Rs. 10700/-pm so we have to collect the PAN card from landlord and deduct the T.D.S during payment of rent now outward.
  Kindly clear my doubt..

This circular is related to TDS to be deducted on salary by employer.
It doesn’t have nay relation with TDS on rent (u/s-194 I). For deducting TDS on making payment of rent you should be guided by the provision of section 194 I which remain same as it was.

Resource:- (i) Section 10(13A) read with Rule 2A of the Income Tax Act,1961

(ii) Circular : No. 90 [F. No. 275/79/72-ITJ], dated 26-6-1972 by CBDT

(iii) Letter : F. No. 12/19/64- IT(A-I), dated 2-1-1967 By CBDT

(iv) Circular : No. 9/2003, dated 18-11-2003/[Para 5.2-(9)].

(v) CIRCULAR NO : 08 /2013 dated 10^th Oct 2013

Kindly note that this article is for the purpose of knowledge sharing and no one shall use this for commercial purposes.  The author shall not be responsible or liable for the result of any action to anyone, of any kind, in any manner, taken on the basis of this article.

This article has been shared by CA CHANDRA KISHOR BAJPAI