House Rent Allowance (HRA) is an allowance paid by employers to their employees as a compensation for the rent they pay for residing at homes in the city where their workplace is located. Normally HRA is part of the annual ‘Cost to Company’, normally known as CTC.
Only salaried employees can claim deduction of HRA under Section 10 (13A) of Income-Tax Act, upon fulfilment of the following conditions:
# Employee should receive HRA from employer;
# Employee must reside in rented house and pay rent;
# Produce proof of payment such as rent receipt, lease agreement
Upon fulfilment of the above conditions, the employee can claim exemption of least of the three below:
# Actual HRA received from employer;
# 50% of salary if living in metropolitan cities or 40% of salary in other cities;
# Rent paid in excess of 10% of aggregate of salary.
For the purpose of calculation, salary comprises of basic salary, dearness allowance (forming part of retirement benefit) and commission or bonus received.
Whether rent paid by employee to his parents is entitled for HRA deduction?
Section 10(13A) does not debar an employee from claiming deduction of HRA, even if it is paid to their parents. However, the parents have to include such income, while computing their total income. While claiming such deduction, the employee has to make sure that all documentary evidence are in place such as lease agreement, bank statements evidencing payment of rent, rent receipt, and letter to society intimating about the rental agreement.
Other important points
# An employee can claim deduction of interest on housing loan and HRA simultaneously, in case where his own house is given on rent (eg. Own house in Delhi) and he is working in different city (eg. Working in Mumbai);
# There may be situation where an employee is not getting HRA, but he is still paying rent or non-salaried employee might be paying rent. Such employees / individual are entitled for deduction of rent paid under section 80GG of the Income-Tax Act. The deduction is minimum of following three:
– Rent paid minus 10 percent of total income
– Rs. 5,000/- per month
– 25% of total income for the year
Here total income means gross total income as reduced by Long Term Capital Gain, Short Term Capital Gain where security transaction tax is paid and deduction under section 80C to 80U, except section 80GG.
(By Gopal Bohra, Partner N. A. Shah Associates LLP, and Milin Bakhai, Deputy Manager Tax, N. A. Shah Associates LLP)