When it comes to taxation, a salaried employee is the one who pays the most tax because, a salaried employee don’t have much options to plan tax and to save it.
Whenever a person gets a job the first question that he ask is what is his take home salary because he knows that even though his CTC i.e. cost to company might be a big figure but after removing taxes, provident fund etc. he just gets a very small amount to take home.
A salaried employee always complains that compared to a businessman he don’t have much option to save tax or claim expenses even when both of them are earning more or less the same.
Now one of the major options to save tax with a salaried employee are Home loan or House rent allowance (HRA).
In very rare situations an employee is able to take benefit of both. House rent allowance allows the salaried employee to reduce the rent paid from his total salary.
However this is not that simple for income tax purpose as one won’t get straight away deduction of entire rent paid. Income tax department has prescribed a method to calculate your house rent allowance governed by section 10(13A) of the Income tax act which is as under:
“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.
Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—
(a) the residential accommodation occupied by the assessee is owned by him ; or
(b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him ;“
Thus, from the above section it is clear that one would get HRA benefit only for the house occupied by him because many people have query that rent paid by assessee for a premises rented for his parent would be allowed as HRA. According to the section this won’t be available.
Now let’s have a look at the method prescribed for calculation of such HRA prescribed in “rule 2A” of the Income tax act which is as under:
“The amount which is not to be included in the total income of an assessee in respect of the special allowance referred to in clause (13A) of section 10 shall be
(a) the actual amount of such allowance received by the assessee in respect of the relevant period; or
(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; or
(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,
whichever is the least.
(i) “salary” shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule;
(ii) “relevant period” means the period during which the said accommodation was occupied by the assessee during the previous year.“
Let’s first understand what meaning has been assigned to salary in clause (h) of rule 2 of 4th schedule which is the basis for HRA calculation and same is as under:
“salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
Thus, from the above definition it is clear that there are three components which should be available with one to calculate HRA relief:
1. Salary as mentioned above.
2. Actual HRA provided in Salary.
3. Actual rent paid.
Let’s take an example to understand the calculation:
Person A stays in Jaipur for job and pays monthly rent of Rs. 12000 and his salary structure is as under:
Basic pay: Rs. 40,000, H.R.A.: Rs. 15,000 and Other allowance Rs. 25,000.
Now as per the method prescribed above the amounts relevant for the calculation are as under (Here salary would be just 40,000 as there is no dearness allowance):
1. Actual HRA i.e. 15,000
2. Actual rent paid less 10% of salary: 12,000 less 10% of 40,000 i.e. 12,000 less 4,000 i.e. Rs. 8,000
3. Since Jaipur is not covered in above list so 40% of salary i.e. 40% of 40,000 i.e. 16,000.
As per method prescribed lower of all 3 would be reduced from salary i.e. 8,000 in this case. This, is how one can calculate HRA exemption from his total salary.
Q. A question which many people ask is whether one can claim HRA exemption even when HRA is not a component of salary?
Ans. In that case answer would be NO HRA exemption would be available. As per the calculation method first point is actual HRA received, now when no HRA is received same would be zero and in that case lower of the following would be zero and hence no HRA exemption would be available.
Q. Next and most common doubt which many people have that can one claim HRA even when company has not provided its benefit in Form 16 even when HRA is a salary component?
Ans. The answer to this is there can be many reason for the company to do so i.e. you might have not provided them with rent receipt or you might have left job in the middle and they might have not provided you that benefit. In any of the above scenario there is no restriction on employee to claim HRA if HRA is a component of salary and employee has actually paid rent.
This is when it is important to file Income Tax return because company might have deducted more TDS as HRA claim was not provided and you can claim refund of same by filing return.
Thus, with the above article I think many of the doubts related to HRA must be cleared which were there in minds of people.
Important Note: If a person chooses to opt for new tax slab rate under 115BAC, exemption of HRA won’t be available. To calculate the benefit you can download calculation sheet for same: https://www.taxontips.com/calculation-sheet-for-comparison-of-tax-payable-under-new-and-old-tax-regime-for-individual-and-huf-115bac/
To download the calculation Sheet CLICK HERE!!!!
To file your Income Tax return or salaried return CLICK HERE.
About the Author:
Naman Maloo (C.A., B.Com.)
He is currently working as Partner – Direct Tax with Jain Shrimal & Co. in Jaipur having experience in dealing Assessments, Tax Audit, Tax planning for NRI, Business planning and consultation.