House Rent Allowance (HRA) Rules and calculations

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Many salaried employees may not be aware of the House Rent Allowance (HRA)
exemption and its potential benefits, especially if they’re not familiar with tax laws or
if their employers haven’t adequately communicated these benefits. It’s essential for
both employees and employers to understand HRA exemptions to maximize tax savings
and ensure compliance with tax regulations.

We have seen many cases where salaried person declared rent less than what he
actually pays due to house owner denied in providing PAN.

We have come across situations where salaried person is in presumption that entire
HRA component in their salary is allowed as exemption and they are not aware of how
income tax allows.

House Rent Allowance

Section 10(13A) of the Act grants exemption in respect of any house rent allowance
received by an employee from his employer subject to the satisfaction of certain basic
conditions. Rule 2A prescribes the quantum of exemption admissible.

Copy of Section 10(13A) as below:

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 ;

Quantum of Exemption is specified in Rule 2A of Income Tax Rules 1962

For determining the quantum of exemption, the place where the accommodation is
situated is divided into:

1) Major cities i.e., Mumbai, Delhi, Calcutta and Chennai

2) Other places

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If living in major cities, Exemption is least of the following;

a) Actual HRA Received

b) Rent paid – 10% of Salary

c) 50% of Salary

Note: Salary = Basic + DA (forming part of retirement benefits) If living in other places,
Exemption is least of the following;

a) Actual HRA Received

b) Rent paid – 10% of Salary

c) 40% of Salary

Note: Salary = Basic + DA (forming part of retirement benefits).

Example:

Mr. CA Koushik Reddy is working in MNC company and having gross LPA of Rs.
12,00,000 and components of LPA as follows:

a) Basic = Rs. 6,50,000

b) DA = Rs. 1,50,000

c) HRA = Rs. 2,00,000 and

d) Other Allowance = Rs. 2,00,000

Mr. Koushik is residing in 2BHK flat for rent in Bangalore and paying rent of Rs. 20,000
per month. His HRA exemption under sec 10(13A) is calculated as follows;

a) Actual HRA received [Rs. 2,00,000]

b) Rent Paid – 10% of Salary [Rs. (20000*12) – Rs. (10% of (650000+150000)) = Rs.
1,60,000]

c) 40% of Salary [40% of (650000+150000) = Rs. 3,20,000]

HRA Exemption is least among the three i.e., Rs. 1,60,000

Q&A

Q.1 Whether payee necessarily be the landlord?

Ans. There is no stipulation, either in section 10(13A) or in rule 2A, that the employee
should pay the rent only to the landlord of the house occupied by the employee. Even in
cases where payments are deposited in courts or with Rent Controller, the exemption

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can be availed by the employee.

Q.2 In case of assessee living in wife’s house, Can HRA be claimed by the
Husband?

Ans. In Bajrang Prasad Ramdharani v. Asstt. CIT [2013] 37 taxmann.com 186/60

SOT 66 (URO) (Ahd. – Trib.) assessee’s claim for exemption under section 10(13A) was
disallowed on ground that rent was paid by the assessee as tenant to his wife who was
landlord and both were living together. The Tribunal held that since house was owned by
wife of the assessee and the assessee had paid rent to her through bank transfer entry,
the assessee had fulfilled twin requirements of section 10(13), i.e., occupation of house
and payment of rent, and, thus, would be entitled to exemption under section 10(13A).

Q.3 Does Employer – Employee relationship is mandatorily required?

Ans. In CIT v. UK Bose [2013] 29 taxmann.com 219/212 Taxman 399 (Delhi) in return
of income, the assessee disclosed salary received from ‘S’ and claimed deduction under
section 10(13A) on basis of rent paid by him which had been debited from his salary
directly. The Assessing Officer rejected assessee’s claim taking a view that income
received by the assessee was not taxable under head ‘salary’ but under head ‘income
from other sources’. It was held that since it was not case of the Assessing Officer that
relationship between ‘S’ and the assessee was not that of a master and servant,
impugned order passed by him was to be set aside and the assessee’s claim for
deduction was to be allowed.

Q.4 Does PAN of the Land Lord Required?

Ans. Earlier, the government noticed that few employees submitted fake rent receipts to
claim the HRA exemption and avoid paying taxes. Also, there are some cases where
employees submit fake receipts higher than the actual rent.

If your yearly rent is above ₹1 lakh per annum, you’ll need to share your landlord’s PAN
with your employer.

Q.5 Can I Claim Both HRA & Deduction on Home Loan Interest?

Ans. Yes, you can claim both HRA (House Rent Allowance) and deduction on home
loan interest in India under certain conditions. This can be beneficial for taxpayers who
are paying rent and also have a home loan.

Conditions for claiming both HRA and home loan interest deduction:

You must be a salaried individual receiving HRA as part of your salary.

You must be residing in a rented accommodation in the same city where you work.
You must have availed a home loan for a property in your own name or jointly with
your spouse.

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Homeowners, who are paying back their home loan and getting HRA as part of their
salary, can avail both the house property-related tax benefits to lower their taxable
income. There can be cases where you work in one city and live on rent, your family
resides in another city, and you buy a home where your family is.

A homeowner (salaried and living in rent home in another place) can claim:

1. HRA exemption towards rent payment

2. Deduction on home loan interest as per Section 24

3. Principal Repayment under Section 80C

4. Deduction for interest on home loan under Section 80EE or Section 80EEA

Conclusion: Navigating the complexities of HRA exemptions requires a comprehensive

understanding of tax laws and regulations. Salaried employees and employers alike
must familiarize themselves with the rules to optimize tax savings and ensure
compliance. With proper knowledge and adherence to regulations, both employees and
employers can benefit from HRA exemptions while avoiding potential pitfalls.

*****

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Name: CA Dasiripalle Koushik Reddy

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Company: R A M AND ASSOCIATES
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