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.

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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 

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