As per the Income Tax Act of 1961 the individuals belonging to the salaried class in India are entitled to a number of allowances. These allowances include transport allowance (not available now as per the Budget for FY 2018-19), children education allowance, hostel allowance, compensatory city allowance, etc.
Allowances and perquisites comprising a part of the salary income can save tax liability for salaried persons to a certain extent.
Not all the allowances granted by the employer are fully exempt from including in total income. Some of them partly exempt and some are fully taxable.
An example of a partly exempt allowance is House Rent Allowance (HRA) Online. It could be fully taxable as well, depending upon the HRA actually received and other factors mentioned in section 10(13A) of the Income Tax Act, 1961.
1] Brief Overview
HRA is one of the most common allowances received by an employee.
It is given to employees who live in rented accommodation/house. Thus, it can be availed by employees who pay rent.
Self-employed individuals or employees who live in their own apartment/house are not eligible for this exemption. In cases where the employee does not pay any rent then the HRA received from the employer is fully taxable.
2] Statutory Limit for the Calculation of HRA
As per section 10(13A) and Rule 2A of the Income Tax Act, 1961 and Income Tax Rules, HRA exemption is determined on the basis of the following criteria.
The amount that is least of the following three is granted as HRA exemption.
- Amount of HRA received by the employer during the relevant financial year.
- The amount calculated after deducting ten percent of salary from rent paid.
- Fifty percent of salary if the employee is living in metropolitan cities (Mumbai, Delhi, Kolkata and Chennai) and forty percent of salary if the employee lives in other cities.
3] The Documents Required to Claim HRA
The following documents are required to claim HRA while filing income tax returns.
1) Rent Agreement
- A valid rent agreement with the landlord is a must have for claiming HRA.
- There have been rulings in litigations regarding to HRA exemption where the judgments have been passed that rent receipts merely will not suffice to claim an exemption.
- Thus make sure you get a rent agreement signed between you and your landlord even if they are related parties like parents or relatives.
- The agreement must bear every detail significant like the amount of rent paid by you and other charges like utility payment or property tax etc.
- In case the accommodation is shared by multiple tenants, then the rent agreement must mention the breakup and ratio of rent payment and other charges that are shared between the tenants.
2) Rent Receipts
- The second most important document is the rent receipt that is received from the landlord. Thus always make sure to preserve the rent receipts that the landlord will provide you at the time of collecting the rent, irrespective of the channel used for making the payment.
- It is mandatory to furnish the rent receipts to the employer for claiming HRA if the rent paid is more than three thousand rupees per month.
It is of utmost importance that rent payment must always be made via banking medium like cheque or any online facility like NEFT.
- If the rent payment exceeds one lakh annually then, in addition to rent receipts, it is mandatory to furnish the PAN Card of the landlord to the employer to avail the benefit of the exemption. It will also aid in lowering the TDS deduction.
- If the PAN of the landlord is not available, then a declaration must be obtained from the employer along with Form 60. They must be submitted to the employer to claim HRA exemption.
4] How to Claim HRA while Filing Income Tax Returns
If the employer has failed to exempt HRA while deducting TDS on salary, then one can claim HRA while filing the income tax returns.
This could take place if the employer does not receive appropriate documents and thus he will deduct a higher TDS on the salary since his tax projection statement will not exempt HRA.
The form 16 of the employee will show the HRA as fully taxable. Thus the amount taxable in the form 16 will be higher than the tax liability computed by you.
In return filing forms, the CBDT (Central Bureau of Direct Taxes) has asked for the detailed breakup of the salary excluding allowances, allowances that are taxable, etc.
While filing ITR-1 form online on the Income Tax E-filing Portal, the details related to HRA must be furnished under tab 5 under the ‘taxes paid and verification’ section.
It will also ask to provide details of income that are exempt from tax.
1) Exceptional Scenarios in Claiming HRA
There could be unusual circumstances in claiming HRA that may raise a few questions.
2) If an individual owns a house but is staying in a different city
One can enjoy the simultaneous benefit of deduction available for a home loan against principal amount repayment and interest and HRA as well in case the house owned is rented out and the individual is working in a different city.
The primary requirement is to always make the rent payment via banking channels so that it can reflect in the statements.
The premises in which individual resides must not be owned by him but his parents only.
By the definition of relationship and scope, one cannot pay rent to his / her spouse since it is viewed that both are supposed to buy the accommodation together. This scenario could attract scrutiny.
It is important to maintain documentary evidence even is rent is paid to parents.
4) Persons not receiving HRA
Non salaried individuals who do not have HRA benefit can use section 80GG for tax relief.