November 28, 2013

CA CS ICWA TAX PROFESSIONALS PORTAL - House Rent Allowance - full concept - with examples

House Rent Allowance (HRA):-

What is House Rent Allowance and when it is provided?

As per Section 10(13A) of Income Tax act: - ““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.]””

Meaning: - HRA is given by the employer to the employee to meet the expense in relation to the rent of the accommodation which the employee is taking for the residential purpose.

When it is provided?
a)      When no accommodation facility is provided by the employer to the employee.
b)     To meet the expenses of House rent of the employee.


Treatment of HRA in Income Tax Act.

Under the Income Tax act, HRA provided by the employer to the employee is exempt as per the provisions contained under the act.

What is exemption and how it is provided: -

a)    An exemption is an amount of money that is automatically excluded from taxable income by law.
b)  Any allowance will be called exempted only, if it is specifically exempted under the Income Tax Act.
c)   An exempted allowance received by the employee from the employer is not taken in the calculation of the total salary of the employee.

For example: -

Particulars
Amount
HRA Received from the employer
Less: - HRA exempt u/s 10(13A)       
Taxable HRA
XXXX
             X     
XXX

           
Provisions relating to the exemption of HRA under the Income Tax Act.

Section 10(13A) and Rule 2A provides provisions relating to the exemption of the HRA.     

Rule 2A provides three limits for HRA exemptions.
a)   the actual amount of such allowance received by the assessee in respect of the relevant period
b)     the amount by which the expenditure actually incurred by the assessee in payment of rent in respect of residential accommodation occupied by him exceeds one-tenth of the amount of salary due to the assessee in respect of the relevant period;
c)     an amount equal to—
(i) where such accommodation is situate at Bombay, Calcutta, Delhi or Madras, one-half of the amount of salary due to the assessee in respect of the relevant period; and
(ii) where such accommodation is situate at any other place, two-fifth of the amount of salary due to the assessee in respect of the relevant period,]


In Simple Language: - Minimum of 3 will be as exempted HRA
           
S.no
Particular
1
Actual HRA Received from the employer
2
Rent paid by the employee exceeds 1/10 of salary received by employee
3
An amount equal to: -
If Accommodation is situated in Delhi, Calcutta, Bombay or Madras – 50% of salary.

Otherwise – If accommodation in any other area – 40% of salary.
           

Salary means: - Basic pay + Dearness Allowance (if the terms of employment so provide)


For example if : -

Mohan’s Salary details as under:-
Basic Salary                                                  Rs. 7000 per month

Dearness Allowance                                     Rs. 2000 per month
(40% of which forms of retirement benefits)

House Rent Allowance received                  Rs. 3000 per month

Rent paid by Mohan                                      Rs. 3500 per month
(House situated in Chandigarh)
                                   

Solution:-

First we will calculate Salary for the Computation of HRA

Particular
Amount
Basic Pay  7000*12
84000
Dearness Allowance  2000*12 = 24000
But only 40% part of retirement benefits
Hence 24000*40%

9600
Total Salary for HRA Computations
93600


Computation of HRA

Particular
Amount
Actual HRA Received from the employer    3000*12
36000
Rent paid by the employee exceeds 1/10 of salary received by employee
3500*12 - 93600*10%
32640
An amount equal to: -
As house situated in Chandigarh , so 40 % of salary
93600*40%

37440

Minimum of 3 is exempt i.e 32640

Then taxable HRA will be as under



Particulars
Amount
HRA received from the employer
Less: - HRA exempt u/s 10(13A)
Taxable HRA
36000
32640
3360


No exemption will be available in the following cases: -

As per Section 10(13A)

a)      the residential accommodation occupied by the employee is owned by him
b)     the employee has not actually incurred any expenditure on payment of rent


Other points: - Employee has to provide the proof of rent paid to the employer in the form of rent receipts or any other proof to the satisfaction of the employer.

As per Circular 8/2013 dated 10-10-2013

a)   Employees drawing house rent allowance upto Rs 3000/- per month will be exempted from the production of rent receipt

b)    If annual rent paid by the employee exceeds Rs 100000 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. 



By CA Ashish Barthwal


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