Taxability of house rent allowance

Based on the mails that I receive, House Rent Allowance remains the most-discussed topic. Typically, employees receive a certain amount of HRA. They either already own a flat or about to buy one. Consequently, they are worried that if they own a flat, they may lose the HRA deduction.

Or, the other way around - since they are receiving HRA, the concern is that they may not be eligible for home loan deductions. This week, let us discuss the topic in detail. However, for that we need to first understand how HRA actually works.

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HRA is basically an allowance. It forms a part of your taxable salary. It is not mandatory for the employer to give you HRA, it depends upon the policy of the company. If your employer does provide HRA, you will receive it no matter whether you own a house, don't own a house, pay EMI, don't pay EMI, whether you pay rent or live with your parents or whatever. In other words, the HRA is like your basic salary. You can receive it every month, regardless of your 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 amount of HRA after reducing the deduction will be subject to tax.

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This deduction depends upon the city you live in and the amount of rent that you pay. We shall discuss this in detail a bit later. However, let's 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 simple answer is no. The two are not connected. In other words, HRA and home loan provisions are two different issues as far as the Income Tax Act (ITA) is concerned and one does not influence the other.

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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 that you have bought or intend to buy will not be affected.

Hopefully, this has come as a relief to readers of this column. Now, let's move on to understand how much HRA deduction that you would be eligible for and the way to calculate it. As mentioned before, the employer provides the HRA and the deduction can be claimed as long as you satisfy certain conditions.

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The first and the foremost condition is that you have got 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. In other words, no rent, no deduction.

Note that it is not necessary that you have to pay rent to a landlord. It may be 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.

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Now, the basic exemption limit for a senior citizen is Rs 2,40,000. Split between mom and dad, the total amount of rent could be much as Rs 4,80,000 (Rs 2,40,000 x 2) without tax incidence. So you get your HRA deduction, they don't pay any tax and everyone wins. Now, before you even think about it, 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 are supposed to live together under the same roof - they cannot charge each other rent. 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), else the limit is up to 40%.

So in a nutshell, the HRA deduction is the least of the following:

Actual HRA received
50% of salary for employees living in metros and 40% otherwise
Excess of the rent paid over 10% of salary.

For example, say Ashish earns a basic salary of Rs. 60,000 per month. He rents an apartment in Mumbai for a monthly rent of Rs. 25,000. The actual HRA he receives is Rs. 20,000. Vikram's HRA deduction will be the least of the following three figures:

Actual HRA received i.e. Rs. 20,000
50% of salary i.e. Rs. 30,000
Excess of rent paid over 10% of salary i.e Rs 25,000 – Rs 6,000 = Rs 19,000

Therefore, the HRA deduction for Ashish would be Rs 19,000 and consequently, the taxable component of the HRA would be Rs 20,000 (HRA received) less Rs 19,000 (HRA deduction) i.e. Rs 1,000.

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.

The authors may be contacted at wonderlandconsultants@yahoo.com