House rent allowance is one of the most important components of one's salary, and gets taxed if not claimed for
HOUSE rent allowance, or HRA, is a major component of your salary. This is given by an employer to an employee to meet the cost of renting a home. As a salaried employee you can claim a tax exemption on such an amount. But there are certain conditions that you need to understand to claim such exemptions.
How is the exemption on HRA calculated?
The tax exemption on HRA is computed as the minimum of following three conditions:
i) Actual HRA as per you pay slip;
ii) 40%/ 50% of your basic salary;
iii) The rent amount minus 10% of the salary
If you stay in a metro —Mumbai, Kolkata, Delhi or Chennai — your HRA would be 50% of your salary. In other cities/towns, it would be 40% of salary. For example, if your salary is Rs 40,000 and you live in Mumbai, HRA would be Rs 20,000 (50% of the salary). Let's assume that you a pay a rent of Rs 15,000. The amount of rent paid minus 10% of the salary is Rs 6,000. The least of these is Rs 6,000, which would be taken as the HRA exemption. Hence the balance (i.e. rent minus HRA exemption) Rs 9,000 will be taxed.
When can you claim exemption on HRA?
You can claim exemption on rent given to parents. For example, you live with your parents and pay them rent. This would technically make your parents the landlords. In such an case, one of your parents should declare the rent paid by you in his/her personal income tax return to prevent litigation in future. However, you cannot claim exemption on rent paid to your spouse. Tax experts say that the relationship between a husband and wife is not commercial in nature and they are supposed to stay together.
You should provide your employer with accurate rent information so that the company can credit you with the eligible amount of relief before deducting tax at source. Another alternative is that you can also claim such exemption when you file the tax return and seek a refund.
If you receive HRA for the period during which you were not occupying a rental accommodation, then you can't claim any tax exemption. In all cases it is advisable for you to maintain rent receipts as they are the only proof for rent payments.
Is your landlord an NRI?
According to Section 195, all Indian income of an NRI is subject to TDS. This rule applies to rent too. Any resident Indian is subjected to TDS for rents of over Rs 1.20 lakh per annum. But if you have rented a house from an NRI landlord, the onus is on you to deduct tax at source and pay it to the government. The TDS is a flat 30.9%.
When can you enjoy the twin benefits of home loan and HRA?
If you have taken a home loan to buy a house, say, in Mumbai, but you reside in another city, you can get tax benefits on your housing loan.
If you have bought a house but stay in a rental accommodation in the same city because your house is not ready for possession, you are entitled to tax benefits on HRA. You can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete for possession, the HRA benefit stops.
However, if you have bought a house by taking a home loan and stay in a rented accommodation after giving you house on rent, you will be entitled to all the tax benefits mentioned above.
Rent-free accommodation vs HRA
The government had announced the new perquisite rules in December 2009, which are effective retrospectively from April 1, 2009. The value of the perquisite determined in case of furnished accommodation is 10% per annum of the cost of furniture if owned by the employer. In case of hotel accommodation, the perquisite value is to be determined as 24% of the salary paid or payable or actual hotel charges paid by the employer, whichever is lower, for the period during which such accommodation is provided to the employee.
So under the new rules, should one opt for rent free accommodation or claim exemption on HRA? You should take a decision keeping in view your requirements, salary level, perquisite value and the tax impact.