Issues Pertaining to HRA claims

Introduction

Have you heard about recent clarification of CBDT regarding Relief for taxpayers on HRA claims! Income Tax Department clarifies no special drive to reopen mismatch cases.

The Ministry of Finance recently issued a clarification regarding media reports suggesting a special drive by the Central Board of Direct Taxes (CBDT) to reopen cases linked to House Rent Allowance (HRA) claims. These reports, according to the Ministry, are not grounded in reality, and there is no substantial evidence to support claims of a large-scale reopening of cases.

So,let's understand exemption rules, eligibility, documents to be required & calculation about HRA i.e. House rent allowances.

What is HRA?

House rent allowance is a common element of income of person earning income from salary. Which provides tax saving opportunities for employees living in rented accommodation as it is provided by employer to cover the cost of living of their employees.

Taxability & Exemption?

HRA is a part of salary hence initially it will be counted as a taxable income. However, an Assesses can avail either wholly or partly exemption under section 10(13A) of income tax act provided that employee must be reside in rental accommodation.

Point to keep in mind

As we know every year an Assesses has to select one of the regimes for his tax liability as Exemption u/s 10(13A) would be available to an assesses only if he exercises the option of shifting out of the default tax regime provided u/s 115BAC(1A). Simply HRA cannot be claimed under the default tax regime u/s 115BAC as its only allowed under the OLD TAX regime.

Quantum of Exemption & Calculation

Under section 10(13A) house rent exemption will be exempt to the extent of least of the following.

• Salary for this purpose includes Basic salary + Dearness allowance(in terms)+ turnover Commission
• Exemption is not available to an assessee who lives in his own house, or in a house for which he has not incurred the expenditure of rent.

Let's understand it with an illustration

Suppose Mr. X has the following receipts from his employer

1. Basic Salary: Rs. 50,000 (Per Month)
2. Dearness Allowance: Rs. 5,000 (Per Month)
3. Commission (Other): Rs. 50,000
4. House Rent Allowance: Rs. 15,000 (Per Month)

Mr. X is paying rent of Rs. 16,000 p.m for his accommodation at Ahmedabad & opted old regime

Solution:

WN:1

Documents to keep aside

To claim HRA Employees must provide their employer with rent receipts & the annual agreement with landlord. Additionally, if annual rent exceeds Rs. 1 lakh the employee must furnish Landlord's PAN to the employer to avail HRA exemption. Tenant must not forget to deduct TDS @30% if required.

If you are paying rent to relatives like parents, spouse or family members you can still claim HRA exemption provided you don't own any rented premise, however it is crucial to maintain documentary evidence to substantiate the authenticity of the tenancy transactions Hence keep records of Banking transactions, rent receipts & rental agreements to support your claim. Failure to convince tax authorities may lead to rejection of HRA claim.

There are so many instances where the HRA claims has been rejected by tax authorities due to doubts on genuineness of the claims. Paying rent to spouse may also face legal scrutiny according to assessing officer hence it is required to maintain robust documentation to prove the legitimacy of their claimed exemption.