Criteria you must fulfil to claim HRA exemption

Posted online: Tuesday, Oct 15, 2013 at 0000 hrs
Staying in your wife’s house and paying her contractual rent could never have sounded so beneficial. A salaried taxpayer is eligible to claim a house rent allowance (HRA) exemption under Section 10(13A) of the Income Tax Act, 1961, in respect of an accommodation occupied him, except where the residential accommodation is owned by him or he has not actually incurred the rent expenditure.

Consequently, an HRA exemption is available for least of the following amounts:

a) Actual HRA amount received from the employer;

b) The amount of rent you pay for your house in excess of 10% of your basic pay;

c) Fifty per cent of basic salary if you reside in a metro city and 40% of basic pay, for non-metro cities.

For salary earners, rent and withholding tax (TDS) cough up a large portion of salary with limited tax savings available in the form of Section 80C on specified contributions, Section 80D towards payment of medical insurance premium, etc. A tax break for payment of rent is much desired and a deserved relief for this group.

In a recent judicial precedent of Bajrang Prasad Ramdharani vs ACIT, the revenue authority disallowed the claim of HRA exemption, primarily on the ground that the taxpayer and his wife were living together, hence, the claim for payment of rent to the wife was just to avoid payment of taxes and to reduce the tax liability.

The Appellate Commissioner confirmed the action of the revenue authority, acknowledging the fact that the rent was paid by the taxpayer as a tenant to his wife, who was the landlord. While he observed that the landlord (wife) and the tenant (husband/ taxpayer) are living together in the same house, this fact indicated that the whole arrangement for payment of rent is a colourable device. The taxpayer appealed before the tribunal.

In July 2013, the Ahmedabad bench of the Income-Tax Appellate Tribunal passed a landmark decision and allowed the exemption of HRA to the taxpayer. In its decision, the tribunal highlighted that for granting a claim of exemption under this Section, the satisfaction of twin conditions was critical (occupation of the house by the taxpayer, interestingly, even if shared with his wife and family and payment of rent supported by adequate documentation). These facts were duly confirmed by the lower authorities and, hence, the exemption ought to be allowed.

While this will be an applauded clarification for assesses paying rent to their spouses (and could be extended in the context of other family members), one may want to examine its applicability and apply the ruling with caution vis-ŕ-vis situations where the rental income is taxable in the hands of the tenant under the clubbing provisions; after confirming of the tax rates applicable to both the taxpayer and the spouse; and based on the supporting documentation.

In either case, it may be advisable to seek a fact specific consultation as the taxman for now may not be set to allow this exemption.

Jay Unarkar

(The writer is associate director, Tax & Regulatory Services, EY. Views expressed are personal)