House Rent Exemption Under Section 10(13A) Read with Rule 2A

Employees generally receive a house rent allowance (HRA) from their employers. This is a part of the salary package, in accordance with the terms and conditions of employment. HRA is given to meet the cost of a rented house taken by the employee for his stay. The Income Tax Act allows for deduction in respect of the HRA paid to employees. The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. It is to be noted that the entire HRA is not deductible. HRA is an allowance and is subject to income tax.

An employee can claim exemption on his HRA under the Income Tax Act if he stays in a rented house and is in receipt of HRA from his employer. In order to claim the deduction, an employee must actually pay rent for the house which he occupies. Below are the Frequently Asked questions about HRA.

Frequently Asked Question About HRA.

How to Calculate HRA Income Tax Exemption?

According to section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules, House Rent Exemption will be least of following three:

1. Actual HRA received
2. Rent paid in excess of 10% of salary (Basic + DA)
3. 40% of salary (50% if residing in a metro i.e., New Delhi, Kolkata, Chennai or Mumbai)

Salary for the above purpose means BASIC + DA. However, private sector organizations, usually, doesn’t provide DA to employees.

Let’s take an example. Suppose that you’re residing in Mumbai and paying a rent of Rs 20,000 p.m. and that your salary package comprises the following:

Basic — Rs. 70,000 p.m.
DA — Nil
HRA — Rs. 35,000 p.m. (50% of basic)

Now, the exempted amount of HRA will be least of the following three figures:

1. HRA received i.e., Rs. 35,000
2. Rent above 10% of basic i.e., Rs. 23,000 (Rs. 30,000 – Rs. 7,000)
3. 50% of basic i.e., Rs. 35,000

The least of the three is Rs 23,000; therefore, in this particular case you’re entitled for HRA tax exemption of Rs. 23,000 p.m. (per month).

Whether HRA calculation to be done on monthly basis or annual basis?

There are four variables in HRA tax calculations: namely, salary (i.e., basic pay plus DA), HRA received, rent paid and the city of residence (whether metro or non-metro). In case all of the four remain the same throughout the year, the HRA tax exemption calculation is to be done on ‘annual’ basis. On the other hand, if there is a change in any of the variable during the year then HRA tax exemption calculation is to be done on monthly basis. 

What if the place/city of residence and place/city of working is different?
In such a case for the purpose of HRA calculation, place of residence will be considered and not place of working. Suppose that you’re working in a factory or a company located in Sonepat (near New Delhi) while residing in New Delhi. So, for the purpose of HRA, your maximum entitlement for tax purpose will be 50% of the basic instead of 40% because for metros HRA tax entitlement is 50% and for non-metros it is 40%.

Can a self-employed person claim tax benefit for the rent paid?
As the self-employed person doesn’t receive any salary, so there is no HRA and consequently question of HRA exemption – under section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules –doesn’t arise.

However, to take care of such a situation, there is a separate provision in the Income Tax Act, whereby a person not in receipt of HRA but incurring rent expenses for his residence can claim a deduction under section 80GG which is quite similar to section to 10(13A) but some additional conditions have been imposed.

What if the employer refuses to allow the HRA tax benefit?
Nothing to worry about. Just claim it while filing your return of income and get the refund of excess TDS deducted from your salary. But, first try to convince your employer and clarify his doubts, if any, regarding your eligibility for claiming it. If your case is indeed genuine, I don’t think your employer should have any problem in allowing HRA tax exemption. 

Can both the working spouses claim HRA tax benefit separately?
Yes, Why not? If both of them are paying rent and landlord issues either two separate rent receipts or only one receipt specifying the amount or proportion paid by each, then both husband and wife are entitled for HRA exemption according to the amount of rent paid.

Can Rent be paid to Spouse to avail HRA benefits?

Rent Cannot be paid to Spouse. The Relationship between a Husband and a Wife is not a commercial in nature; a husband and wife are supposed to stay together. Therefore payment of rent paid to spouse will not be accepted by the income tax authorities. Such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny, so steer clear of these. However in the Case of Bajrang Prasad Ramdharani Vs Ass CIT, ITAT held that person is liable to get the house rent exemption under section 10(13A) of income tax act.

Can I pay rent to my parents, Brothers or Sisters to avail HRA benefits?

You can pay rent to your parents, however, they need to account for the same under ‘Income from House Property’ and will be entitled to pay tax for the same.

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 tax laws. Sham transactions can only spell trouble under scrutiny, so steer clear of these.

What evidence needs to be submitted for claiming HRA?
The only evidence required for claiming HRA tax exemption is proof of rent payment (i.e., the rent receipt issued by the landlord). A lot many people think that you also require rent agreement for claiming HRA tax exemption but there is no such requirement in tax laws.

Furthermore, even the requirement of production of rent receipts have been dispensed with for the salaried employees drawing HRA (house rent allowance) up to Rs 3,000 per month. Please note that this relaxation is only for the purpose of TDS on salary and in the regular assessment, tax assessing officer has the power to ask for the relevant evidence, if deemed necessary.

Besides, please carefully note the above limit of Rs 3,000 is for the amount of HRA received per month and not for the amount of rent paid. For example, if you’re drawing a monthly HRA of Rs 4,000 p.m. but paying a rent of Rs 2,500 per month, you’ll have to submit the rent receipt for claiming HRA. 

Whether PAN no. of landlord needs to be mentioned on rent receipt?
Yes, if rent paid for the year exceeds is Rs. 1 lacs . (Cir. No. 8/2013). If land lord does not have PAN then declaration to be taken from him. Refer Below Link for more clarification.

http://www.studycafe.in/2013/10/hra-exemption-landlords-pan-mandatory.html

Can I claim tax benefit of HRA if I have my own house?  

No, one cannot enjoy the tax benefits of own house with HRA, as one cannot pay rent to oneself. Hence, whole of HRA received becomes taxable under “Income from Salary”. 

Is it possible to claim HRA as well as home loan tax benefits?
Yes, certainly. There is no relationship between claiming HRA exemption and claiming interest deduction for housing loan. The tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other. As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under income from other sources.

Following benefits can be claimed:

1. Tax benefit on principal repayment under Section 80C – Repayment of Housing Loan
2. Tax benefit on interest payment under Section 24(a) & (b). Max(Rs.1,50,000)
3. HRA benefit.

Can I avail tax benefit of HRA if I have a house ready for occupation but cannot reside in it?

In this case, the Income Tax Act permits the individual to claim HRA and home loan benefits which includes both principal and interest repaid on the home loan, if you are residing in a rented apartment in the same city where your house is located for genuine purpose.

But, if your house is vacant then you still have to pay notional rent income. 

Here there are two possibilities:

1 –  Your own house remains unoccupied while you stay in any other accommodation due to employment/business/profession reasons 
You may stay at a place – it may be a different city or a different location within the same city - different from the place where your own house is situated.
a. Rented accommodation i.e., you’re paying rent
In this case, you can claim HRA tax exemption while your house will also be treated as self occupied house property for purpose of income tax and you’ll get all the housing loan tax benefits i.e., both interest deduction u/s 24(b) and principal repayment under section 80C. 

b. Non-rented accommodation i.e., you’re not paying rent As the rent is not being paid, the question of HRA tax exemption does not arise. However, your house will be treated as self-occupied and you’ll get the housing loan tax concessions (i.e., interest deduction under section 24 and deduction for principal repayment under section 80C).

2- Your house remains unoccupied while you stay in any other accommodation due to any other reason whatsoever (other than professional/employment/business reasons)
a. Rented accommodation i.e., you’re paying rent 
In such a case, although you’ll be entitled for HRA deduction, your own house loses the status of self-occupied property and will be treated as deemed to be let out, and thus its notional rental income will be taxable in your hands.

b. Non-rented accommodation i.e., you’re not paying rent 
For instance, for your personal convenience you live with your parents in their house while your house remains unoccupied. Here, if you don’t pay any rent, you’re not entitled for HRA deduction.

Further, your own house won’t be treated as self-occupied for tax purposes.In other words, your own house will be treated as deemed to be let out and its notional rental income will be taxable in your hands.

However, irrespective of tax status of house i.e., whether self-occupied/deemed to be let-out/let-out, you’ll continue to get the interest deduction on home loan under section 24(b) and deduction for principal repayment under section 80C.

In a nutshell, if you’ve a house, either stay in it or rent it out. Don’t leave it vacant. In case you have to leave it vacant, it should be only for employment/business/professional reasons. Even in such a case you should be either living in a different city or at different place within the same city, and not in the immediate vicinity of your house (i.e., the location where you stay should be at a considerable distance from your own house). Otherwise, notional rental income of your house (even if it is the only house you own) becomes taxable in your hands although you continue to get the interest deduction on housing loan u/s 24(b) and deduction for principal repayment of loan u/s 80C.

Furthermore, as regards the HRA, you will be getting the tax exemption under section 10(13A) so long as you are staying in a rented accommodation and actually making the rent payment, irrespective of whether you are having your own house(s) or not.