House Rent Allowance is a very important component of one’s salary. The tax implications of the house rent allowance (HRA) seem to baffle most people. Taking the case of two individuals, Akram and Rafiq, who work in the same company, I have tried to explain this allowance in detail.
One significant difference between the two individuals, which is necessary for this study, is that Akram resides in his own house while Rafiq in a rental accommodation.
Are both eligible for HRA?
Yes. Because the payment of HRA by an employer does not depend upon its end-use by the employee. An employee may prefer to stay in his/her own accommodation but will still be eligible to receive HRA if it is a part of the salary package. This is so, because HRA, as its name suggests, is an Allowance supplementing the Basic Salary and Dearness Allowance/Pay, if any, in a salary package.
Is HRA taxable?
In the case of Akram, who stays in his own house, tax is payable on the full amount of HRA received by him. Rafiq, living in a rented accommodation, may qualify for relief on the HRA received by him, such relief being dealt with under section 10 (13A) of the Income Tax Act, 1961.
When is HRA exempt from tax?
A salaried individual, in order to get an exemption on his/her HRA, must fulfill the following basic conditions:
One significant difference between the two individuals, which is necessary for this study, is that Akram resides in his own house while Rafiq in a rental accommodation.
Are both eligible for HRA?
Yes. Because the payment of HRA by an employer does not depend upon its end-use by the employee. An employee may prefer to stay in his/her own accommodation but will still be eligible to receive HRA if it is a part of the salary package. This is so, because HRA, as its name suggests, is an Allowance supplementing the Basic Salary and Dearness Allowance/Pay, if any, in a salary package.
Is HRA taxable?
In the case of Akram, who stays in his own house, tax is payable on the full amount of HRA received by him. Rafiq, living in a rented accommodation, may qualify for relief on the HRA received by him, such relief being dealt with under section 10 (13A) of the Income Tax Act, 1961.
When is HRA exempt from tax?
A salaried individual, in order to get an exemption on his/her HRA, must fulfill the following basic conditions:
- The employee must not live in his/her own house
- He/she must pay rent for accommodation
- Such rent must be more than 10 per cent of his/her salary
Is Rafiq exempt from tax?
Rafiq fulfils the first two conditions. The amount of his salary and rent paid by him will determine whether he meets the last condition too. If Rafiq's monthly salary is Rs 15,000, he will qualify for HRA exemption should the rent paid by him exceed Rs 1,500 (10 per cent of salary).
How much will Rafiq's exact exemption amount to?
The extent to which HRA is exempt is limited to the least of the following:
Rafiq fulfils the first two conditions. The amount of his salary and rent paid by him will determine whether he meets the last condition too. If Rafiq's monthly salary is Rs 15,000, he will qualify for HRA exemption should the rent paid by him exceed Rs 1,500 (10 per cent of salary).
How much will Rafiq's exact exemption amount to?
The extent to which HRA is exempt is limited to the least of the following:
- For residential accommodation located at Bombay, Delhi, Calcutta or Madras - an amount equal to 50 per cent of salary and 40 per cent elsewhere
- HRA actually received by the employee
- Excess of rent paid over 10% of salary
Assume:
Rafiq's annual salary = Rs 1,80,000
HRA = Rs 63,000
Monthly rent = Rs 3,000
Rental accommodation situated at: Hyderabad
Rafiq will be eligible for exemption on HRA to the extent of Rs 18,000 being the least of the following:
Rafiq's annual salary = Rs 1,80,000
HRA = Rs 63,000
Monthly rent = Rs 3,000
Rental accommodation situated at: Hyderabad
Rafiq will be eligible for exemption on HRA to the extent of Rs 18,000 being the least of the following:
- Rs 72,000 (being 40 per cent of salary since rented house is at Cochin)
- Rs 63,000 (being HRA actually received)
- Rs 18,000 (annual rent of Rs 36,000 - Rs 18,000 which is 10 per cent of salary)
How should one avail of this exemption?
Provide your employer with information about the rent so that he can credit you with the eligible amount of relief before deducting tax at source. You can also claim such exemption when filing your tax return and seek a refund.
In all cases where HRA exceeds Rs 600 per month (Rs 7,200 per annum), evidence of rent paid, meaning rent receipts, have to be produced. The assessing officer has the right to call for proof of payment.
Points to remember
Provide your employer with information about the rent so that he can credit you with the eligible amount of relief before deducting tax at source. You can also claim such exemption when filing your tax return and seek a refund.
In all cases where HRA exceeds Rs 600 per month (Rs 7,200 per annum), evidence of rent paid, meaning rent receipts, have to be produced. The assessing officer has the right to call for proof of payment.
Points to remember
- Allowances are different from reimbursements in that they are usually fixed in value and are paid irrespective of whether the recipient incurs expenditure or not. They are aimed at meeting specific requirements like entertainment and travel. They could also be of a compensatory nature like a border area/remote area allowance could be paid to an individual posted in the Lakshadweep Islands.
- Salary for HRA purposes = Basic Salary + DA/DP + commission (only if calculated as a fixed percentage of turnover achieved by the employee)
- Salary will not include any arrears for earlier years, which are received during the previous year.
- If a bonus is received for the last year in the current year, such amount of bonus will not be included in HRA salary for the purpose of determining HRA exemption. You can include the amount of bonus due to you for the current year which you will receive only in the next year.
- Salary will include all amounts due (even if not received) pertaining to the period during the previous year during which the rental accommodation is occupied by the employee.
- HRA actually received has to necessarily pertain to the period in the previous year when the rental accommodation is occupied by the employee - meaning, HRA received for that period during which the employee was not occupying the rental accommodation will not be exempt. (If Rafiq were occupying his rented house for only 9 months during the year, then the HRA exemption of Rs.18,000 computed above will get restricted to Rs.13,500 (pertaining to the period of his occupancy).
- You can pay rent to your parents provided they show the same in their Income tax Returns. This would save both of you from future litigation. You can however, NOT pay rent to your spouse. The relationship is not commercial in nature; a husband and wife are supposed to live together. So, such a payment will not be accepted by Authorities.
