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Will it or won’t it? After the recent corporate tax breaks, there have been reports that the government will give relief to individual tax payers too. There have also been reports to the contrary, suggesting that a respite is unlikely as the Centre is facing fiscal stress. While the speculation continues, one report said that a fresh relief will be accompanied by removal of some existing tax breaks, including the one offered on house rent payment.
If this relief is taken away, it could turn into a no-win situation for many because the tax break on house rent allowance (HRA) one gets from the employer can be significant. Its removal could offset other relief that the Centre may offer. As it stands, the HRA is exempt from tax — fully or partially — under Section 10(13A) of the Income Tax Act. The benefit comes with certain conditions and restrictions, though.
Rules
To claim the HRA exemption, you must live in a rented residential accommodation paying regular rent. If you live in your own house or at a place where you don’t pay rent, then you cannot claim the exemption. House rent paid to the spouse does not qualify for exemption. You can, however, claim exemption on rent paid to parents or brethren or in-laws.
If you rent a house for a certain period in a year, then the exemption is allowed for that particular period only. Say, you receive HRA for the entire financial year (April-March), but you rent a house during October to March only, then you cannot claim exemption on HRA received during April to September.
Also, you need to pay the rent to claim exemption. If the rent is due but unpaid, then the tax exemption on HRA is not available. Employers usually insist on proof of rent paid (rental agreement/receipts from the landlord) before adjusting the HRA exemption in the monthly tax calculation.
How much?
There are restrictions on the benefit that can be claimed and therefore, the entire HRA amount may not be exempt from tax. Exemption is limited to the lower of the following three amounts:
a) The HRA amount received
b) Rent paid in excess of 10 per cent of salary
c) 50 per cent of salary if you live in Mumbai/Delhi/Kolkata/Chennai or 40 per cent of salary in other cities (see the accompanying table). Salary here means the sum of basic pay and dearness allowance.
So, if the rent you pay does not exceed 10 per cent of your salary (basic pay + dearness allowance), you get no tax exemption on the HRA received. Also, salary is calculated on ‘due’ basis — if you receive salary arrears of earlier years or advance salary pertaining to future years, it will not be considered while calculating the tax exemption.
Pay rent, but get no HRA?
What if you don’t get any HRA, but pay rent? This could be the case with those whose emoluments do not include the HRA component. The Income-Tax Act provides relief to this category of rent-payers too, under Section 80GG.
To claim this benefit, you must pay rent for the house you live in and not get HRA for even a part of the year. Also, you must not own a house in the place in which you live, or work, or carry out business. Your spouse or minor child or Hindu Undivided Family (if you are part of one) should also not own a house in that place. Also, if you own a house at another place, which you declare as self-occupied and use it for your own residence, you don’t get the deduction.
In short, to claim the deduction, you should not own and occupy a house anywhere, and your spouse or minor child should also not own a house in your place of stay.
You can claim tax deduction restricted to the least of the following: a) ₹5,000 a month, b) rent paid in excess of 10 per cent of your total income, c) 25 per cent of your total income (See the table) .
Here, the total income means your taxable income from all sources (salary, capital gains, house property, business or profession, and other income) and considers all deductions except those under Section 80GG.
So, the maximum deduction you can claim on rent paid if you do not receive HRA is ₹5,000 a month, irrespective of how much you shell out as rent.
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