House Rent Allowance- HRA Rules for Income Tax

The term “HRA” stands for House Rent Allowance. It is allowance paid by the employer to the employee for the purpose of payment of rent for accommodation. It is also a part of the salary structure of an employee. However, the amount of HRA is not fixed. It depends on various criteria.

The main point is that the amount of HRA is not fully taxable. According to the provisions of section 10(13A) of the Income Tax Act 1961, a part of the HRA is exempted.

1. Eligibility Criteria

As you already know that the HRA is a part of the salary structure of an employee. Therefore, only salaried Individual is eligible for the HRA.

2. HRA exemption u/s 10(13A)

According to the provisions of section 10(13A) of the Income Tax Act 1961, the minimum of the following shall be exempt from tax

• Actual HRA received
• Rent paid in excess of 10% of Salary
• 50% of Salary/40% of Salary. (50% in case of Metro Cities. 40% in the case of Other Places.)

3. Computation of Salary for HRA calculation

Here the term “Salary” includes the following

• Basic Salary
• Dearness Allowance (Forming a part of retirement benefit)
• Commission (as a fixed percentage of turnover)

As you know the amount of salary of an employee is very much important for the purpose of computation of taxable HRA. For calculation salary, the following points are very much important.

Basic Salary

Basic Salary is the fixed amount paid to the employees by the employer. It is the base amount of a salaried individual in his/her salary structures. It does not include any other benefits or amount paid by the employer to employees. All other allowances, benefits are calculated based on this basic salary.

D.A. (Dearness Allowance)

It is allowance paid to employees to meet the cost of living.

Due to inflation, the cost of living is very high and it is gradually increased by time to time. To face this problem, DA is given to the employees.

It may also be noted that for the purpose of HRA calculation, the amount of DA must be forming part of retirement benefit.

Commission

The term “Commission” is a very confusing one. It may be treated as business income or it may be your income from other sources.

In order to get HRA exemption, it must be in your salary structure.

The nature of your commission income is depended on the sources of that income.

If you are engaged in an agency business like LIC agent, your commission income shall be treated as business income. It may also be noted that in order to become a business income, the commission is your major or main source of income.

The amount of commission shall be treated as salary income if it is included in the employment contract. It must be based on the fixed percentage on turnover.

On the other hand, if you are a salaried individual and the commission income is not part of your salary then it will be your income from other sources.

4. Practical Example of HRA calculation

Let us take the following example:

Mr. Avishek is a salaried employee. His monthly salary is Rs. 10000 per month. DA is Rs 5000 per month (60% is forming part of retirement benefit). The amount of commission is Rs. 3000 per month (it is on turnover). Rent paid by him is Rs. 4500 per month. HRA received Rs. 4000 per month. Calculate the taxable value of HRA.

Computation of the amount of Salary for HRA purpose.

Basic Salary	Rs. 10000 x 12	Rs. 120000
Dearness Allowance	Rs. 5000 x 60% x 12	Rs 36000
Commission	Rs. 3000 x 12	Rs 36000
Total		Rs. 192000

Here total salary eligible for HRA calculation is Rs. 192000.

Now the amount of exemption under section 10(13A) shall be lower of the following:

a) Actual HRA received – (Rs. 4000 x 12) = Rs. 48000

b) Rent paid over 10% of Salary – {(4500 x 12) – (192000 x 10%)} = (Rs. 54000 – Rs. 19200) = Rs. 34800

c) 50% of Salary – (Rs. 192000 x 50%) = Rs. 96000

Hence, the amount of exemption will be Rs. 34800. The balance amount of HRA shall be taxable i.e. Rs.13200 shall be taxable.

5. Documents required for getting HRA exemption

If you are staying in a rented house and are getting HRA from your employer, you are eligible for HRA exemption as per section 10(13A). However, the following documents are required:

• If the amount of rent is more than Rs. 3000, you have to submit rent receipts/rent agreement to your employer.
• If the total rent paid in the year is more than Rs. 100000, PAN of the landlord must be reported.
• In case of unavailability of PAN, a declaration of the landlord must be needed. (Properly explain in the subsequent points)

6. PAN of the Landlord for HRA exemption

According to the Circular Number 8/2013 dated-Oct 10 2013, if the annual rent paid by the employee exceeds Rs. 100000 per annum, it is mandatory for the employee to report the PAN of the landlord to the employer.

What will happen if the landlord does not have any PAN card or has denied submitting you his/her PAN?

Read the following points.

How to claim HRA exemption if the landlord does not have PAN?

In case the landlord does not have PAN, a declaration from the landlord about it along with the name and address of the landlord should be furnished by the employee to the employer.

Please remember

• Ask your landlord about PAN before entering a rental agreement.
• If he does not possess PAN, request him for declaration.
• If he expresses his unwillingness to give you either of the above, you will miss your exemption.
• Therefore it is better to clear everything before your tax filing. At the end of the financial year if you miss to furnish it then you may face a serious problem.

Format of declaration from the Landlord

Declaration Regarding Not Having Permanent Account Number

I____________ (Name of the Landlord), S/D/W of ___________ (Name of the father of Landlord) do here by declare that I have given on rent the house property ______________ (Details of the Property) from ____ to ____, to Mr./Ms.____________ (Name of the Lessor) at a monthly rent of Rs ______/- (______ Only)

I do hereby declare that my total income during the financial year does not exceed the prescribed limit as per Income Tax Act 1961.

Further, I confirm that I do not hold any Permanent Account number issued by Income Tax Authorities.

The above information is true and correct to the best of my knowledge. I shall be personally liable if the information is found to be wrong. Further, I will furnish my PAN if it is subsequently obtained.

Date                                                                                                                                                                    Name & Signature

Place                                                                                                                                                                            Address

7. Can anyone take the advantage of HRA along with tax benefit of Home Loan?

When you talk about HRA it is the most common and interesting question.

You may stay in a rented house enjoying your exemption in HRA. But you have a plan to buy your own home. So, you have applied for a home loan.

Now what? Can you still eligible for getting the benefit of HRA exemption? Actually, there are two scenarios.

Loan taken for construction of a new house

In this case, you can enjoy both the benefit but up to the date of completion of construction of your house.

After completion, when you will shift from rented house to your own house, you will not eligible to get the HRA exemption.

Actually, you are not eligible for HRA also. But if your employer still provides you this benefit, the entire amount will be taxable.

Why?

Remember the rule of exemption. In this situation, your actual rent paid is nil. So your exempted HRA amount is also nil. (Rent paid over 10% of salary. If Rent paid is nil, then the answer is also nil).

Loan taken for purchase of ready Flat/Home

You have already purchased a ready Home or Flat. What will happen in that situation?

You can’t say that the house is not ready.

Don’t worry. Still, you can enjoy both benefits.

Income Tax Department has properly monitored these types of activities. You have to provide a proper explanation to satisfy them.

In the case of the following situation, you can enjoy both the benefit

• You can’t shift from rented house to own house due to some genuine reasons like the school of children etc.
• Your job location holds you to shift from rented house to own house. You have to stay in the rented house for easy travailing etc.

Moreover, a genuine and real reason is required. Otherwise, the IT department will not allow you.

8. Can you pay rent to your parents for HRA purpose?

Yes, of course. But you have to follow some rule to get HRA benefit. Please read carefully below mentioned points:

• A proper rent agreement must be made between you and your parents.
• Your parents must show that rent as “Income from House Property” in the Income Tax Return.

This is nothing just tax planning.

Remember, Tax planning is good but please avoid Tax Evasion.

9. What will happen if you forgot to furnish rent receipt to your employer?

Honestly speaking, it is not a correct practice. It is your duty to furnish all the required documents to your employer related to income tax.

However, don’t worry! Still, you can get your benefit.

You can claim your HRA exemption at the time of filing your income tax return.

10. What will happen if your employer does not provide you HRA and you are staying in a rented house?

It is a common problem. Your employer is not bound to provide you HRA. Maybe HRA is not implemented in your salary structure.

But you lose some money through rent payment. You have to bear some extra burden in the form of house rent.

Then what?

Are there any other options?

The government also knows that this type of situation is very common. For this purpose Govt. has introduced Section 80GG.

What is Section 80GG? The explanation is given in the next point.

11. Deduction under section 80GG

Section 80GG is applicable in the following situations:

• It is applicable only to the Individual.
• Residential status is not relevant in this case.
• Whether you are a salaried employee or a self-employed person, it is applicable to all.
• If you receive HRA, you are not eligible to section 80GG.
• You can’t claim any benefit for the self-occupied house property.
• A declaration in Form 10B is required to be filed.

Amount of Deduction

The amount of deduction is the minimum of the following:

• Rs. 5000 per month
• 25% of Adjusted Gross Total Income
• Rent paid in excess of 10% of Adjusted Gross Total Income.

What is Adjusted Gross Total Income (AGTI)?

The calculation of AGTI is given below:

Particulars	Amount
Gross Total Income	XXX
Less: Long Term Capital Gain	(XXX)
Less: Short Term Capital Gain	(XXX)
Less: All deduction under section 80C to 80U except section 80GG.	(XXX)
Total	XXXX

That’s all my friend. If you have any question about this topic please ask me in the comment section. If you have any update then please share it.

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