A Study on HRA - It is not an Automatic Exemption

HRA HOUSE RENT ALLOWANCE: All salaried people love to have in their salary slip.  Most of salaried people will claim 100% of HRA as exemption in Form 16 J

HRA is one area where even ITO is more interested to know during scrutiny (Read Myths about HRA). His first question in Income Tax Scrutiny is Are you claiming HRA in form 16?   The First document that ITO wants to see after Form 16 is Payment proof of Rent claimed for HRA exemption. This is one area where people get caught & ITO may disallow HRA exemptions & thereby will increase taxable Income. This increase will make tax payer to pay tax on that increased Income & to pay interest on that.

6 Myths about HRA (wrong knowledge on HRA)

1.     HRA is automatic exemption from Salary

2.     Full HRA is exempt from tax

3.     HRA does not need any proof of payment

4.     ITO will not ask any proof on  HRA Claim if it appears in Form 16

5.     HRA & Housing Loan are mutually exclusive

6.     Rent paid to relatives are not eligible for claiming HRA exemption

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This article aims at enlightening the people more on HRA so that they can get the insight on rules & regulations of HRA. This article also helps assessee to avoid tough time at the time of Scrutiny assessment if they get selected. This also aims to prepare assessee to have proofs related to this exemption.

1)     Section 10(13A) HRA section is as follows

section 10(13A) any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant considerations

Explanation.For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where

(a) the residential accommodation occupied by the assessee is owned by him ; or
(b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him

2)  Rule 2A as per Income Tax Rules (Limits for the purposes of section 10(13A)).

Lowest is allowed as exemption:

a)     Actual HRA received,

b)    Actual Rent Paid -10% of your basic salary.

c)     40% or 50% of Basic

3) Other points about HRA

A.    Payment of Proof is must: Rent agreement is not a proof of payment. Rent receipt is must or payment through cheque on record is must to claim the HRA exemption.

B.    Sharing is allowed: Both Husband & Wife can claim HRA exemption subject to that rent is shared/paid. They can claim exemption up to the share of rent paid actually by each of them.

C.    No Notional Payment: The assessee needs to pay rent actually, not notionally. He can claim HRA exemption if he is paying rent to his mother or any relative (owner of the house) for the house where he resides.

D.    Not for Family: The assessee cannot claim HRA exemption for the house where his parents are residing. HRA is allowance for the assessee & not for family. He can reside with family, but family cannot reside separately to claim HRA exemption.

E.    Monthly Basis: HRA exemption is calculated on monthly basis rather on yearly basis. Assessee can claim HRA exemption for the part of the year too.

4)  Penal Interest provisions for wrong claim of HRA

  If assessee fails to provide proof of Rent payment during Income Tax assessment, then he may end up paying huge interest as mentioned below along with tax on the Increased Income because of disallowance of HRA exemption..

SI	Section	Details of interest
1	Sec 234A	1 % per month of Tax payable amount from due date of filing
2	Sec 234C	3.7% on Tax Payable amount
3	Sec 234B	1 % per month of Tax payable amount if it exceeds Rs. 10,000 from due date of filing

 5)  Impact of disallowance of HRA exemption by ITO during Scrutiny:

Disallowance of HRA exemption will impact more on assessee. This impact varies from person to person.

Eg: HRA exempted is Rs. 5,000 per month & Whole Year 12 months * Rs. 5,000= Rs. 60,000. If assessee fails to provide proof of rent payment, then impact is as below

AY 2009-10
SI	Particulars	10%	20%	30%
1	HRA Disallowed	60,000.00	60,000.00	60,000.00
2	Tax on HRA disallowed	6,000.00	12,000.00	18,000.00
3	Cess	180.00	360.00	540.00
4	Total Tax Payable	6,180.00	12,360.00	18,540.00
5	234A Interest	1,037.00	2,091.00	3,145.00
6	234B Interest	1,281.00	2,583.00	3,885.00
7	234C Interest	226.00	456.00	683.00
8	Total Interest	2,544.00	5,130.00	7,713.00
9	Total Outflow	8,724.00	17,490.00	26,253.00

Calculation of Interest is as on 28^th December 2010

Conclusion: Form 16 is not final. ITO has power to question & ask for proof for any exemptions or benefits claimed in this TDS certificate. Form 16 is just a proof for Salary received & Tax deducted (TDS) by employer during that financial year. It is always safe to have documentation & proof for all exemptions & benefits claimed even in Form 16.

Last but not the least, there is no relation between HRA claim & Housing loan. Assessee can claim both benefits subject to few conditions