Issues Pertaining to HRA claims

Khush Trivedi | Last updated: 11 April 2024

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Recent media reports suggesting a special drive by the CBDT to reopen HRA claims have been clarified by the Ministry of Finance as unfounded. The article explains that House Rent Allowance (HRA) is a taxable part of salary, but exemption is possible under Section 10(13A) of the Income Tax Act if you live in rented accommodation and opt for the old tax regime. The exemption amount is the least of actual HRA received, rent paid less 10% of salary, or 50% (metro cities) or 40% (other cities) of salary.

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.

HRA Claims Clarified: No Special Tax Drive

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.

Metro Cities (i.e. Delhi, Kolkata, Mumbai, Chennai)	Other Cities
HRA actual received for the said FY	HRA actual received for the said FY
Rent paid (-) 10% of salary for the relevent period	Rent paid (-) 10% of salary for the relevent period
50% of salary for the relevant period	40% of salary for the relevant period

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

Basic Salary: Rs. 50,000 (Per Month)
Dearness Allowance: Rs. 5,000 (Per Month)
Commission (Other): Rs. 50,000
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:

Particulars	Amount
HRA Received (15,000*12)	1,80,000
Less: Exempt u/s 10(13A)	1,26,000
Least of the following
(1) Actual Amount Received	1,80,000
(2) Rent Paid (-) 10% of salary (WN:1)	1,26,000
(3) 40% of salary (50,000 + 5,000)*12	2,64,000
Taxable HRA	54,000

WN:1

Particulars	Amount
Rent Paid (16,000*12)	1,92,000
Less: 10% of salary ( 50,000 + 5,000)*12	66,000
	1,26,000

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.

FAQ :

No, the Ministry of Finance has clarified that media reports about a special drive by the CBDT to reopen cases linked to HRA claims are not grounded in reality and there is no substantial evidence to support them.

House Rent Allowance (HRA) is a component of salary provided by employers to employees living in rented accommodation to help cover living costs and offers tax-saving opportunities.

No, HRA exemption under Section 10(13A) is only available if you opt out of the default tax regime (Section 115BAC) and choose the old tax regime.

The exemption is the least of: actual HRA received, rent paid minus 10% of salary, or 50% of salary (for metro cities like Delhi, Mumbai, Chennai, Kolkata) or 40% of salary (for other cities).

You need to provide your employer with rent receipts and the rental agreement. If the annual rent exceeds Rs. 1 lakh, the landlord's PAN is also required. Maintain banking transactions, rent receipts, and rental agreements as evidence.

Yes, you can claim HRA exemption if you pay rent to relatives like parents or spouse, provided you do not own the rented property. However, robust documentary evidence of the tenancy is crucial to prove authenticity.