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House rent allowance (HRA): The essential facts
Over the fast few years corporate employers(especially private sector players) have been gem-tails monetizing the perquisite related to company provided accommodation it is more cost effective for employers to actually pay some additional compensation to the employee rather than to maintain expensive real estate on their books.the monetization generally done hy way nl mini ducmg or adding the clement of Mouse Rem Allowance (HRA) to the compensa tion structure of the employee. Then it is up in die employee concerned to choose whether Ik would like 10 pay rent Tor the premises he or she lives in or make arrangements for owned accommodation. If choosing the former, the employee can obviously also decide nn ihc quantum of rem paid, depending upon the size and location of the premises chosen. Therefore, the moncti/aiion not only works out 10 he overall more economical to the employer but also brings aboui an clc mem of standardization and autonomy to ihe employee compensation structure.So typically, the employee receives a certain amount of HRA. He either already owns a Hal or is about to buy one. Consequently. It is concerned that on account of the ownership flat, he may lose the 1IRA deduction Or. the other way around - since he is receiving HRA. the concern is that he may not be eligible for home loan deductions Let's find out whether these fears arc justified - however, for that we need to first understand how HRA actually works. HAR is basically an allowance, h forms a part of your taxable salary. It is not mandatory for the employer to give you HRA, ( depends upon company policy. 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 rem or live with your parents or whatever. In other words, (he HRA like your Basic-Salary, is received 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. 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 lire not connected In other words. HRA and home loan provisions arc two different issues as tut as the Income Tax Act (ITA) is concerned and one docs 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 mi way influence the HRA deduction that you are entitled to Conversely, notwithstanding the amount of 11RA in.it you receive, your home loan deductions on (he EMIs for (he house that you have bought or intend ( buy will mil he affected.
Hopefully, this has come as a relief to readers of this column. Now. lei's move on to understanding how much HRA deduction that you would be eligible tor and the way lo calculate it. As mentioned before, the HRA is provided by the employer, however deduction there from is provided by the ITA. as long as you satisfy certain conditions.
The first and the foremost condition is that you have got to be paying rent. After all. that is what the allowance is meant tor 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 ii is not necessary that you have to pay rent to a landlord. Ii may be possible that you live in your parents' house — in which case, you may pay rent to your parents and consequently he eligible for the IIRA 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 he rendered tax-free. Now, the basic exemption limit for a senior citizen is Rs. 2.50,000. Split between mom and dad. me total amount of rent could be much as Rs. 5.00.000 (Rs. 2.50.000 x 2) without tax incidence. So you get your I1RA 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. Bui if onlv life were that simple husband and wife are supposed 10 live together under die same roof they cannot charge each other rem. In other words, the relationship between hushand and wife cannot he ioinnu-ia.il in nature.
The other factor that influences the HRA deduction is where you live. If you live in a metro city, you would he 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 not shell, 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 10% of the rent of salary. For example, say Vjkram 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 be receive is Rs. 20.000. Vikram" HRA deduction will he lite least of the following three figures
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. 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 lire not connected In other words. HRA and home loan provisions arc two different issues as tut as the Income Tax Act (ITA) is concerned and one docs 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 mi way influence the HRA deduction that you are entitled to Conversely, notwithstanding the amount of 11RA in.it you receive, your home loan deductions on (he EMIs for (he house that you have bought or intend ( buy will mil he affected.
Hopefully, this has come as a relief to readers of this column. Now. lei's move on to understanding how much HRA deduction that you would be eligible tor and the way lo calculate it. As mentioned before, the HRA is provided by the employer, however deduction there from is provided by the ITA. as long as you satisfy certain conditions.
The first and the foremost condition is that you have got to be paying rent. After all. that is what the allowance is meant tor 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 ii is not necessary that you have to pay rent to a landlord. Ii may be possible that you live in your parents' house — in which case, you may pay rent to your parents and consequently he eligible for the IIRA 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 he rendered tax-free. Now, the basic exemption limit for a senior citizen is Rs. 2.50,000. Split between mom and dad. me total amount of rent could be much as Rs. 5.00.000 (Rs. 2.50.000 x 2) without tax incidence. So you get your I1RA 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. Bui if onlv life were that simple husband and wife are supposed 10 live together under die same roof they cannot charge each other rem. In other words, the relationship between hushand and wife cannot he ioinnu-ia.il in nature.
The other factor that influences the HRA deduction is where you live. If you live in a metro city, you would he 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 not shell, 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 10% of the rent of salary. For example, say Vjkram 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 be receive is Rs. 20.000. Vikram" HRA deduction will he lite least of the following three figures
- Actual HRA received i.c Rs 20.(KX)
- 50% of salary i.e. Rs. 30.000
- Excess of rem paid over 10% of salary i.c Rs. 25,000 - Rs. 6,000 = Rs. 9,000 Therefore, the HRA deduction for Vikram would he 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 hut not the least, don't forget to maintain the rent receipts or a copy of the ease agreement as this serves as proof of having paid the rent.
Last hut not the least, don't forget to maintain the rent receipts or a copy of the ease agreement as this serves as proof of having paid the rent.
Posted in: News 2014
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