Yes, the basic jurisprudence of taxation hovers around the principle that “there is no equity about tax”. Equity and tax could not walk together. Yet to some extent provisions under section 10, which deals with the exemption under the provisions of Income tax, can be called as a rescuer reliever for the salary paid employee, when one talks about Exemption for House Rent allowance under Section 10(13A). The rent in the metropolitan cities is very high and on the same side companies while designing the salary structure are parking considerable percentage, to the extent best possible, under the head House rent allowance.
The person drawing the income under the head salary must be aware about the following while claiming the exemption under section 10(13A) of the Income Tax Act with respect to the house rent allowance.
- 1) The relevant section and the income tax rules which talks about the House rent allowance is Section 10(13A) r/w Rule 2A. Refer
- 2) The exemption under the house rent allowance will be lower of the following amounts
- a) HRA received
- b) Excess of rent paid over 10% of salary
- c) 50 % of salary (if property rented is in Delhi, Kolkatta, Chennai, Mumbai) in other cases 40%
- 3) In case where the rented accommodation is occupied by the employee only for the part of the year the exemption amount would be calculated only for that part. For instance, where an employee A employed in XYZ Ltd for full year of 12 months but he lived in the rented accommodation say only for the period of 6 months. In that case the HRA exemption will be calculated only for the period of 6 months for rest of the 6 months the amount of HRA received will be fully taxable.
- 4) For the purpose of calculating HRA as per above referred formula in point no 2) Salary has been given a different meaning “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites. Hence by and large, it can be concluded that it includes only basic salary.
Let’s understand the concept of HRA exemption with the help a simple example; For example , Ramesh draws the monthly income of INR 50000 as a Salary with basic pay INR 25000, HRA 15000,specilal allowance 10000. He pays rent of INR 15000 to his landlord. He resides in Delhi during the financial year 2016-17 for full period of 12 months. From the above referred details the exemption under section 10(13A) can be computed as follows ;
It would be least of the following;
- a) Amount of the HRA i.e. 15000 x 12 months = 1,80,000
- b) Excess or rent paid over 10 % of salary i.e. ( 15000×12) – (10% of 300000)= 1,50,000
- c) 50% 0f Salary (50% of 300000)= 1,50,000
Hence while computing income taxable under the head salary employee(Ramesh) will claim the exemption of INR 150000 under section 10 (13A) the remaining HRA of INR 30000 will be taxable under the head salary.
Suppose in the above referred example Ramesh occupied a rented accommodation only for the period of 6 months for the rest 6 months he resides with his parents and had not paid any rent. (Rest of the facts remaining same) The HRA exemption will be claimed as follows;
It would be least of the following;
- a) Amount of HRA for the period during which rented accommodation occupied (15000 x 6 months ) i.e. =90,000
- b) Excess of rent paid (for the period of 6 months for which house occupied) over 10% of salary for 6 months i.e. (15000 x 6)- (10% of 150000) = 75,000
- c) 50% 0f Salary for 6 months (50% of 150000) = 75,000
Hence while computing income taxable under the head salary employee(Ramesh) will claim the exemption of INR 75000 under section 10 (13A) the remaining HRA of INR 105000 (i.e. (total HRA180000) -( exempted HRA75000) will be taxable under the head salary.
Point to note
- a) ‘Salary’ for the purpose of calculation of HRA means Basic Pay, DA if the terms of the employment provides for it, commission based on fixed percentage on turnover achieved by the employee but excludes all other allowances and perquisites.
- b) Salary is to be considered for the period during which rented accommodation is occupied by the employee in our example ‘’Ramesh” has occupied the accommodation for the full period of 12 months.
- c) If employee is residing in a self-owned house or is otherwise not paying rent then he would not be eligible to claim the exemption.
- d) If an employee is residing with the parents and making payment of rent to them, then he can claim the exemption under section 10(13A).
- e) To substantiate a claim of HRA, employee Ramesh has to furnish copy of rent receipt to the employer so that employer could consider and calculate the amount of exemption under section 10(13A). Such rent receipt must mention the PAN of the land lord as the yearly rent payment exceeds INR 100000. Please refer circular8/2013 which reads “if annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is mandatory for the employee to report PAN of the landlord to the employer. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee.” http://www.incometaxindia.gov.in/communications/circular/910110000000000135.pdf.
- f) A new proposed amendment in the Act which recites some extra compliances, which would definitely be perceived as an obstruction by the employees, while claiming the HRA exemption. A newly inserted section 194IB which is applicable from 1 st June,2017 provides that an individual and HUF, even though not liable for tax audit under section 44AB are liable to deduct TDS @5% from the payment of rent if the payment of rent for the month exceeds INR 50000. Hence employee should in their interest while drafting a rent agreement or deciding the terms with the land lord should take into account the recently introduced provisions. Ask to the Land lords for their PAN.
Disclaimer: The aforesaid writeup is for the general guidance of the reader. Not intended to render any professional advice or opinion.