HOUSE RENT ALLOWANCE - CASE STUDY AND PROVISIONS

Employees generally receive a House Rent Allowance (HRA) from their employers to meet the cost of a rented house taken by the employee for his stay. This allowance is generally a part of the salary package or as stated in the terms and conditions of the employment. HRA is taxable under the head Salary. Under the Income Tax Act, certain exemptions in respect of HRA is allowed under section 10(13A) and is regulated by Rule 2A. 

The least of the following is exempt from Income Tax. 

1.  An amount equal to 50% of the salary if the rented house is situated in Delhi, Kolkata, Mumbai or Chennai and an amount equal to 40% of Salary if the rented house is situated at any other place. 

2.  The amount of House Rent Allowance received by the employer in respect of the period during which the rental accommodation is occupied the employee during the previous year, 

3.  The excess amount of rent paid over 10% of the salary received by the employee during the previous year. 

Note: Salary for the purpose of calculation of exemption shall mean the Basic Salary received by the employee and includes dearness allowance if any. As decided in Hughes Softwares System Limited vs ACIT Delhi (2013) (ITAT Delhi), it also includes any commission/incentive received by the employee based on a fixed percentage of turnover achieved by the employee as stated in the terms and conditions of employment contract. 

Example: Sumit, who resides in Ahmadabad gets a Basic Salary of Rs 10,00,000 and HRA Rs 6,00,000. The rent paid by him is Rs. 7,00,000 . Calculate the amount of taxable House Rent Allowance for the previous year 2013-14. 

Answer: The least of the following is exempt from income tax out of the HRA Rs 6,00,000 received by Sumit 

(a)  Rs 4,00,000 being 40% of the basic salary received by Sumit . 

(b)  Rs 6,00,000 being the amount of HRA received by Sumit .

(c)  Rs 6,00,000 being the excess of rent paid over the basic salary received by Sumit. (Rs. 10,00,000*10% = Rs. 1,00,000. Rs.  7,00,000 – Rs. 1,00,000 = Rs 6,00,000) 

Therefore the exempt amount is Rs 4,00,000.

IMPORTANT POINTS 

Rent Paid to Spouse/Parent 

As decided in Bajrang Prasad Ramdharani vs ACIT (ITAT Ahemdabad) (2013) for HRA exemption if the rent is paid to spouse/parent is valid if all the below conditions are fulfilled: 

·    The residential accommodation occupied by the assessee  is not owned by him

·    The assessee has actually incurred expenditure on payment of rent in respect of the residential accommodation occupied by him. 

Deduction Allowable on Actual Payment of Rent 

As decided in CIT vs P.D. Singhania (Allahabad High Court) (2006) deduction is only allowed only if the rent is actually paid by the assesee, therefore HRA exemption is allowed if proper documents in support of rent paid (monthly rent receipts stamped are issued monthly) and rent agreement is duly executed on a properly stamped paper. 

S. 10(13A) ‘Salary’ does not include bonus for Calculation of HRA :- Bonus cannot be regarded as falling within the scope of the expression salary as defined in Clause (h) of Rule 2. Clauses (b) and (c) of Rule 4 contain a clear indication that the expression salary takes in only periodical payments made by the employer to the employee during a year by way of remuneration. Commissioner Of Income-Tax vs B. Ghosal (Kerala High Court) – 1980 125 ITR 744 Ker 

Note: Normally in a rented property, the electricity/water bills are borne by the tenant and therefore ensure that such charges are paid out of the assessee’s own funds. 

It is also advisable for the landlord (spouse/parent) to declare the rented received as income in the Income Tax return filed by him to avoid litigation. 

HRA deduction u/s 10(13A) and Housing Loan Exemption u/s 24(1) 

·         If the own property and rented property are in different cities, both exemption can be claimed. 

·         If the own property and rented property are in the same city deduction can only be claimed if the assessee can prove that the own property is far off from the work place and therefore he/she stays in the rented property. 

Note that the own property should be self occupied and not rented out to claim deduction on house loan.