House Rent Allowance (HRA) is one of the important components in the salary structure of any employee.
It provides maximum tax relief to employees residing in a rented accommodation during their tenure of employment. The exemption is claimed under the Section 10 (13A) of the Income-Tax Act, 1961, read with Rule 2A of Income Tax Rules, 1962.
The employee must stay in a rented house during the period for which exemption is being claimed and have actually incurred the expenditure on payment of rent. The least of the following is exempt: Actual HRA received by the employee; rent paid less 10% of salary; 50% or 40% of salary (50% for Delhi, Mumbai, Chennai and Kolkata and 40% for other cities). Thus, the place of residence assumes importance. For the purpose of computing HRA exemption, salary means basic salary, dearness allowance (if the terms of employment so provide) and commission based on a fixed percentage of turnover achieved by the employee.
This can be explained with the help of the following illustration. X lives in Delhi and is earning a monthly salary income of R20,000 (basic R5,000 and HRA R5,000). He pays R4,000 as monthly rent. The available exemption for X would be: HRA received (R): 5,000; Rent paid less 10% of salary (R): 4000-1500 = 2,500; 50% of salary (R): 7,500
The exemption would be available for least of the above, i.e., R2,500. The remaining portion out of HRA received, i.e., R2,500 will be fully taxable in the hands of X.
It is imperative that the employee submits rent receipt/agreement to the employer for availing the HRA exemption. The employer needs to only obtain a rent receipt/agreement from the employee; however, he is not required to verify the receipt for granting the exemption. For administrative convenience, an employer is not required to obtain any rent receipt from an employee if the rent is less than R3,000 a month.
It is mandatory for the employee to report the PAN of his landlord to the employer if the annual rent paid exceeds R1 lakh per annum. If the landlord does not have a PAN, the employee is required to submit a declaration to this effect from the landlord.
It is possible for an employee to avail the HRA exemption even if he owns a house but stays in a rented accommodation. The exemption can be claimed only if the employee owns a house in one city, but is unable to occupy it due to employment in another city. Similarly, if an employee has taken a loan for his own house, he can avail the deduction of interest as well as repayment of principal towards loan even if he is claiming HRA exemption while staying in a rented accommodation in another city.
Hence, if an employee owns a house in another city and is repaying the home loan, he is able to claim the benefit of interest paid up to the specified limits while computing ?income from house property?. Further, the benefit of principal repayment can also be claimed under Section 80C of the Act within the overall limit of R1 lakh.
Divya Baweja
The writer is senior director, Deloitte in India. With inputs from Preeti Gupta, manager & Ankit Setia, assistant manager, Deloitte Haskins & Sells