As per my inbox, the most frequently asked question has to do with the house rent allowance (HRA). Typically, the employee receives a certain amount of HRA.
Perchance, the entire HRA is not tax deductible
As per my inbox, the most frequently asked question has to do with the house rent allowance (HRA). Typically, the employee receives a certain amount of HRA. He either already owns a flat or is about to buy one.
Consequently, he is concerned that on account of the ownership flat, he may lose the HRA deduction. Or, the other way around — since he is receiving HRA, the concern is that he may not be eligible for home loan deductions.
This week, let us find out whether these fears are justified. However, for that, we need to first understand how HRA actually works.
HRA is basically an allowance, which forms a part of one’s taxable salary. It is not mandatory for the employer to give HRA. But, if an employer chooses to offer the allowance, one will receive it whether or not he owns a house, pays EMI on the home loan, pays rent, or lives with his parents.
In other words, the HRA, like the basic salary, is received every month, regardless of one’s personal situation.
However, the law also provides that if the employee satisfies certain conditions, a deduction will be provided from the HRA received and only the balance will be subject to tax. This deduction depends upon the city one lives in and the amount of rent he pays. We shall discuss this in detail a little later.
Let us first address the issue we started out with. What if you get HRA and also own a house? Does this affect either the HRA deduction or the home loan deductions?
The answer is no. HRA and home loan provisions are two different issues as far as the Income Tax Act is concerned and one does not influence the other. So, you may own a flat or any number of flats, either in the same city that you work in or anywhere else in the whole of India or for that matter abroad.
This will, in no way, influence the HRA deduction that you are entitled to. Conversely, notwithstanding the amount of HRA that you receive, your home loan deductions on the EMIs for the house you have bought or intend to buy will not be affected.
Now, let’s move on to understanding how much HRA deduction you would be eligible for and the way to calculate it. As mentioned before, the HRA is provided by the employer.
However, a deduction thereon is provided by the Income Tax Act, subject to fulfilment of certain conditions.
The first and the foremost condition is that you have to be paying rent. After all, that is what the allowance is meant for in the first place. So, if you are one of the lucky few who do not have to pay rent for the roof over your head, you don’t get the deduction.
Note that it is not necessary for you to pay rent to a landlord. It is possible that you live in your parents’ house, in which case, you may pay rent to your parents and consequently be eligible for the HRA deduction.
In this case, the rent received will be taxable for your parents — however, if their total income is below the taxable limit, the entire transaction would be rendered tax-free.
As per the provisions of the Finance Act, 2008, Rs 2,25,000 is tax-free for a senior citizen. Split between mom and dad, the total amount of rent could be much as Rs 4,50,000 (Rs 2,25,000 x 2) without tax incidence. So, you get your HRA deduction, they don’t pay any tax and everyone wins.
But, let me clarify that the same structure cannot be adopted in the case of your spouse. Yes, it would be very convenient to pay rent to the non-working spouse and thereby save a load of tax. But, if only life were that simple! Husband and wife cannot charge each other rent as they are supposed to live together under the same roof.
In other words, the relationship between husband and wife cannot be commercial in nature.
The other factor that influences the HRA deduction is where you live. If you live in a metro city, you would be eligible for a deduction of up to 50% of your salary (basic plus DA, if applicable); otherwise, the limit is 40%.
So, in a nutshell, the HRA deduction is the least of the following:
i. Actual HRA received,
ii. 50% of salary for employees living in metros and 40% otherwise, and
iii. Excess of the rent paid over 10% of salary.
Say, Vikram earns a basic salary of Rs 35,000 per month and rents an apartment in Mumbai for Rs 15,000 per month. The actual HRA he receives is Rs 20,000. Vikram’s HRA deduction will be the least of the following three figures:
i. Actual HRA received, i.e. Rs 20,000,
ii. 50% of the salary, i.e. Rs 17,500, and
iii. Excess of rent paid over 10% of salary, i.e. Rs 15,000 - Rs 3,500 = Rs 11,500.
Therefore, the net taxable HRA for Vikram would work out to Rs 20,000 (HRA received) less Rs 11,500 (HRA deduction available), which works out to Rs 8,500.
Last but not the least, don’t forget to maintain the rent receipts or a copy of the lease agreement as this serves as proof of having paid the rent.
sandeep.shanbhag@gmail.com
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