Many salaried employees in India living in rented accommodations are entitled to HRA (House Rent Allowance) as a part of their CTC (Cost to Company). Employers decide the amount of HRA in salary for their employees based on factors such as total salary and city of residence.
Under Section 10(13A) of the Income Tax Act, you can claim up to the full amount of the HRA as tax exemption. This would allow you to save on payable taxes as it lowers your annual income.
Now let us look at various features of HRA and its taxation rules.
HRA is the amount paid by employers over the basic salary so that employees can pay monthly rent. This essential part of the salary slip allows you to manage expenses for renting a house and helps to save on your tax outgo at the year’s end.
House rent allowance deductions are available under Section 10 (13A) and Section 80GG of the Income Tax Act. The first is applicable in the case of salaried individuals living on rent and receiving HRA while self-employed individuals cannot claim it. Moreover, you need to opt for the old (existing) tax regime to claim HRA deduction.
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Under Clause 13A of Section 10 of the Income Tax Act, taxpayers can claim exemption on the HRA component of their salary as a special allowance.
The HRA exemption limit is the least of the following amounts:
Here, salary is defined as per Rule 2 Clause h of Part A of the Fourth Schedule. It is the sum of basic salary, DA (Dearness Allowance) and commissions received on sales turnover (if present in salary).
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Let us take the example of Mr Bakshi, who earns Rs. 25,000 as basic salary and Rs. 2000 as DA from his employer on a monthly basis. He receives Rs. 8000 as HRA for his rented accommodation in Kolkata and has to pay Rs. 1,20,000 in rent per year.
For the assessment year 2021-22, tax exemption u/s 10 (13A) would be the least of the following:
The least amount of these is the actual rent expenses over 1/10th of Mr Bakshi’s annual salary (basic + DA). Therefore, Rs. 87,600 of his received HRA would be exempt from taxes, while Rs. 8,400 of his HRA would be taxable.
You can claim the benefits of Section 10 (13A) and Section 24 (b) simultaneously if you own a house in your name but live in a different city. This is also applicable if you live on rent and have a property under construction.
If you live with your parents and pay them rent, you can claim tax exemptions u/s 10 (13A). To claim tax benefits, the rented premises must not be owned in your name, and you cannot pay rent to your spouse.
Furthermore, you need to have documentary proof of financial transactions with your parents as these invite scrutiny from the Income Tax Department.
Self-employed employees and salaried employees who do not receive HRA can claim tax deductions under Section 80GG of the Income Tax Act. To claim this deduction, you should not own a house at the place where you currently perform office duties, reside, or carry out business/profession. Moreover, your spouse, minor child or HUF (Hindu Undivided Family) should not own a property at this place.
The maximum deduction that you can claim u/s 80GG is the least of the following amounts:
Salaried employees having HRA in salary slips can claim tax exemption for paying rent under Section 10 (13A) of the Income Tax Act. They will need to submit proofs of rent receipts to their employer or when filing income tax returns. In case they do not have receipts, they have to submit a copy of the lease agreement along with bank statements showing rent payments.
In what cases do you need to submit landlord’s PAN for claiming tax exemption?
You have to submit the landlord’s PAN in case you are living in rented accommodation and paying an annual rent of more than Rs. 1,00,000. Otherwise, you will not be eligible for tax exemption under Section 10 (13A).
What is the Dearness Allowance (DA) component in salary?
Some employers provide DA along with salary or pension to adjust for the cost of living incurred by employees and pensioners. It is calculated as a percentage of the basic salary to offset the impact of inflation.
What to do to claim tax exemptions for HRA when living with parents?
The IT Act allows you to claim tax exemptions for HRA when paying rent to parents. You need to enter into rental agreements with parents and pay them rent every month. Furthermore, you will have to furnish a rental agreement mentioning the rent amount and tenure. Note that it is necessary to show bank statements as proof of payment, and your parents need to add the rent to their taxable income.
What steps have been taken to curb tax evasion in case of rent payments to parents?
The Income Tax Appellate Tribunal (ITAT) has put in place several new rules to deal with cases of fraud regarding Section 10 (13A). Assessing Officers can question individuals and ask for additional documentation when they feel rent receipts are not adequate proof.
When do you need to deduct TDS when paying rent?
Under Section 194-IB, you will need to deduct TDS in case your monthly rent is more than Rs. 50,000. Except in cases of audits u/s 44AB, you have to deduct TDS at 3.75% to 5% from the rent you pay to your landlord, depending on the date of payment/credit.
Failure to comply with the above rules would result in a penalty of Rs. 200 per day along with an interest of 1% to 1.5% per month.
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