House Rent Allowance or HRA as it is popularly known by any salaried individual has generally been a source of big tax saving tool. However, this allowance also becomes a cause of concern for lot of individuals, who face the heat from the tax authorities in proving that the claim of deduction to be genuine.
House Rent Allowance is given by the employer to the employee to meet the expenses in connection with rent of the accommodation which the employee might have to take for his residential purpose. This House Rent Allowance so paid by the employer to his employee is taxable under head “Income from Salaries” to the extent it is not exempt u/s 10(13A)
|(Less)||Exempt u/s 10(13A)||(xxx)|
The balance amount after claiming HRA Exemption would be added in the total salary of the employee and would be taxed as per the income tax slab rates.
House Rent Allowance exempt u/s 10(13A)
HRA received is exempt u/s 10(13A) to the extent of the minimum of the following 3 amounts:-
- Actual House Rent allowance received by the employee in respect of the relevant period
- Excess of Rent paid for the accommodation occupied by him over 10% of the salary for the Relevant Period
- 50% of the salary where the residential house is situated in Mumbai, Calcutta, Delhi or Chennai and 40% of the Salary where the house is situated at any other place for the relevant period.
Points to be noted
- Relevant period means the period during which the said accommodation was occupied by the assessee during the financial year.
- Salary for this purpose includes dearness allowance if the terms of the employment so provide but exclude all other allowances and perquisites. This dearness allowance will be included to the extent it is part of salary as per the terms of employment. All other allowances and perquisites will not be included.
- Where the employee has not actually incurred expenditure on payment of rent or stays in his own accommodation, no exemption of House Rent Allowance is available.
- If the Rent paid by the employee to his landlord is more than Rs. 1 Lakh in a year, the PAN Card No. of the Landlord would be required to be furnished.
Ram is entitled to a basic salary of Rs. 5,000pm and dearness allowance of Rs. 1000 per month, 40% of which forms part of Retirement Benefits. He is also entitled for House Rent Allowance of Rs. 2,000 pm. He actually pays Rs. 2000 pm as rent for a house in Delhi.
In the above scenario, we first have to calculate the salary of Ram
Salary (5000X12) Rs. 60,000
Dearness Allowance (40% of 12,000) Rs. 4,800
Total Salary for the purpose of computation of HRA Rs. 64,800
Now, the minimum of the following 3 amounts shall be exempted from tax
- a) Actual HRA Received (2000X12) Rs. 24,000
- b) Rent Paid in excess of 10% of salary (24000-6480) Rs. 17,520
- c) 50% of Salary 32,400
If you stay with your parents and intend to claim HRA exemption by paying rent to your Father. Yes you can claim it but need to ensure following points:
We have listed the key requirements for your benefit.
- Ensure that your parent/s have a Permanent Account Number (PAN)
- Ensure that you draw up a rent agreement and preferably get it stamped and registered. This may be a one-time cost but brings a lot of credibility to the document.
- Ensure that you actually pay the rent to the parent/s every month. It would be best to pay the same by cheque but in case you intend to pay in cash then ensure that you have adequate cash withdrawal in your bank account to justify the rent payment in addition to your other house-hold expenses.
- Ensure that you generate a receipt for the rent payment. This could be done on a plain paper OR on pre-printed rent receipts available at any stationery shop.
- Remember to affix a revenue stamp on the receipt if the rent exceeds Rs. 5,000.
- Ensure that your parent declares this rent income and files her / his income tax return. This would irrevocably prove that the rent payment is genuine and valid.
Since in most cases if parents are retired and does not have any other income, tax obligation will not arise for them as rental income received will be under taxable limit. Thus it becomes a smart way to save tax legally.