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How to save Income Tax on HRA?

New Delhi: The income tax department has tightened the norms for claiming exemption under house rent allowance (HRA). HRA is given by an employer to an employee to meet expenditure incurred on payment of house rent.

Sushil Chandra Chairman of  CBDT,   the nodal national agency responsible for administering Income Tax department.
Sushil Chandra Chairman of CBDT, the nodal national agency responsible for administering Income Tax department.

Although HRA is a part of the salary but it unlike basic salary, is not entirely taxable. Subject to certain conditions, a part of HRA gets exempted under Section 10 (13A) of the Income-tax Act.

The amount of HRA exemption is deductible from the total income before arriving at a taxable income. This helps the employee in saving tax. Remember, the HRA received is fully taxable if an employee is living in his own house or if he does not pay any rent.

Who can avail HRA?
The tax benefit on HRA is available only to a salaried individual who has the HRA component as part of his salary structure and is staying in a rented accommodation.

How much is exempted?
The exemption for HRA benefit is the minimum of:
i) Actual HRA received
ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and
iii) Excess of rent paid annually over 10% of annual salary

For calculation purpose, the salary considered is ‘basic salary’. In case ‘Dearness Allowance (DA)’ (if it forms a part of retirement benefits) and ‘commission received on the basis of sales turnover’ is applicable, they too are added to compute the minimum HRA exemption available.

The tax benefit is available to the person only for the period in which the rented house is occupied.

Documents
Now, it has become mandatory for an employee claiming HRA exemption to report the PAN of the landlord to the employer if annual rent paid by the employee exceeds Rs. 1,00,000 per annum or if it exceeds Rs 15,000 per month. These measures are aimed at employees who submit counterfeit rent receipts for claiming tax deduction under HRA.

The new norm has come into effect from the financial year 2013-14 or Assessment Year 2014-15.

“If annual rent paid by the employee exceeds Rs. 1,00,000 per annum, it is mandatory for the employee to report PAN of the landlord to the employer,” the Central Board of Direct Taxes said in a circular.

If the landlord does not have a PAN, employees they have to submit a declaration, with the name and address of the landlord. “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,” the circular added.

Even if an employee pays rent below Rs. 8,333 per month, he/she has to produce the rent receipts availing deduction under HRA. However, for administrative measure that salaried employees drawing house rent allowance up to Rs.3000 per month will now be exempted from producing rent receipt.

Example of HRA calculation
Let’s say an employee, with a monthly basic salary of Rs 30,000, receives HRA of Rs 13,000 and pays Rs 10,000 rent for an accommodation in a metro city. The tax rate applicable to the individual is 20 percent of his income.

To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:
i) Actual HRA received Rs. 13,000 X 12(months) = Rs 1,56,000
ii) 50% of salary (metro city) = Rs 1,80,000 (50% of Rs 3,60,000)
iii) Excess of rent paid annually over 10% of annual salary = (Rs 10,000 X 12) – Rs. 36,000 = Rs 84,000

It shows that of Rs 1,56,000 actually received as HRA, Rs 84,000 gets tax exemption and only the balance of Rs 72,000 gets added to the employee’s income, on which a tax of Rs 14,400 ( 20 per cent slab ) gets payable.

Paying rent to family members
The rented premises must not be owned by the person claiming the tax exemption. So if you stay with your parents and pay rent to them then you can claim that for tax deductions as HRA. However, you cannot pay rent to your spouse. As, in the view of the relationship, you are supposed to take the accommodation together. Thus, these transactions can invite the scrutiny from the Income -tax Department.

Own a house, but staying in a different city
One can avail the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home is rented out or you work in another city.

Individuals who don’t get HRA but pay rent
There may be some employees who might not have HRA component in their salary structure. Also, a non-salaried individual might be paying rent. For them, Section 80 (GG) of the Income-tax Act offers help.

An individual paying rent for a furnished/unfurnished accommodation can claim the deduction for the rent paid under Section 80 (GG) of the I-T Act, provided he is not paid HRA as a part of his salary by furnishing Form 10B.

How much exemption Section 80GG
The least of the following is available for exemption from tax under Section 80GG:
(i) Rent paid in excess of 10% of total income
(ii) 25% of the total of the total income*
(iii) Rs 5,000 per month

*Under this section, the total income is calculated as gross total income minus long-term capital gains, the short-term capital where Securities Transaction Tax (STT) has been paid and deductions available under Sections 80C to 80U, except Section 80GG.

Conditions
While claiming a tax deduction, one must remember that the individual himself or his/her spouse, or minor child, or as a member of the Hindu Undivided Family (HUF) must not own any accommodation. Also, if the individual owns any residential property at any place and earns rent from it then no deduction is allowed.

One can avail the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home is rented out or you work in another city. However, the same is not available in case of Section 80GG.

With inputs from other Agencies
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