All about House Rent Allowances and Exemptions
It is common that in the case of Salary payment, the employer breaks up the salary into many components so that the employee can get maximum benefits under the Income Tax provisions.
One such component of Salary break up is House Rent Allowance. There are situations when the employee does not own self house and has to live in rental premises. In order to get the benefit of deduction available in Income Tax in respect of House Rent Allowance, the salary is structured in such a way that maximum exemption is available to the employee.
Here we will look at the provisions of the Income Tax Act regarding the House Rent Allowance and its exemptions.
Section 10(13A) of the Income Tax Act provides that :
(13A) any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant considerations.
Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—
(a) the residential accommodation occupied by the assessee is owned by him ; or
(b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him ;
Thus this section provides an exemption in respect of HRA provided to the employee.
Rule 2A of the Income Tax Rules prescribes the method of calculation of HRA exemption which is as under :
[Limits for the purposes of section 10(13A) .
2A. The amount which is not to be included in the total income of an assessee in respect of the special allowance referred to in clause (13A) of section 10 shall be—
(a) the actual amount of such allowance received by the assessee in respect of the relevant period; or
(b) the amount by which the expenditure actually incurred by the assessee in payment of rent in respect of residential accommodation occupied by him exceeds one-tenth of the amount of salary due to the assessee in respect of the relevant period; or
[(c) an amount equal to—
(i) where such accommodation is situate at Bombay, Calcutta, Delhi or Madras, one-half of the amount of salary due to the assessee in respect of the relevant period; and
(ii) where such accommodation is situate at any other place, two-fifth of the amount of salary due to the assessee in respect of the relevant period,]
(d) [***]
whichever is the least.
Explanation : In this rule—
(i) “salary” shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule;
(ii) “relevant period” means the period during which the said accommodation was occupied by the assessee during the previous year.]
From the above, it can be inferred that the HRA exemption is available as under :
(1) If the employer is residing in Metro City i.e. Delhi, Mumbai, Calcutta, and Chennai, the maximum HRA deduction available is :
(a) 50% of Salary (Salary includes Basic Salary and Dearness Allowance)
(b) Actual HRA Received
(c) Excess of Rent paid over 10% of Salary
The least of the above is exempt.
(2) If the employer is residing in other cities, the HRA deduction is available as under :
(a) 40% of Salary (Salary includes Basic Salary and Dearness Allowance)
(b) Actual HRA
(c) Excess of Rent paid over 10% of Salary
The least of the above is exempt
The HRA exemption can be given by the Employer provided the employee produces a rent receipt to the employer.
Also if due to any circumstances, the employee could not provide the details to the employer, the HRA deduction can also be claimed at the time of filing of IT return by the employee.
However, CBDT vide Circular has mandated that in case the rent paid by the employee is exceeding Rs.100000 for a Financial year, the PAN of the Landlord is a must.
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