HRA Exemption: Precautions to be Taken by Employees for Claiming HRA Exemption under Income Tax

The Income Tax Department recently uncovered 8,000-10,000 high-value cases totalling at least Rs.10 lakh involving bogus House Rent Allowance (HRA) claims. Obviously, the Income Tax Department will apply harsh penalties against these individuals who claim bogus HRA benefits. This article contains cautionary points for salaried individuals claiming HRA that will assist them in the event of Income Tax Scrutiny.

Do take PAN of the Landlord

Ensure you have the Permanent Account Number (PAN) from the landlord. It would be preferable if the same was specified in the rental agreement.

Make a rental agreement with your landlord

It is critical to have a signed rental agreement with your landlord. The rent agreement should be notarized and explicitly state the tenure, rent amount, and property characteristics.

Taking Rent receipts

Rent receipts are vital proof of rent payment if your case is selected for scrutiny. Thus, if you are paying rent, it is a good idea to keep rent receipts, especially if the payment is made in cash.

Rent Payment

The Income Tax Department does not value high-value cash transactions. Ensure that you pay your rent using the banking channel. Making payments in cash is a big no.

ITR Filing

You have no control over whether or not your landlord files his income tax return (ITR). However, if you are paying rent to your parents, please ensure that you submit their return and that the rent paid to them is shown as income.

TDS Deduction

The Finance Act of 2017 added Section 194-IB, which requires a tenant of a property who pays a monthly rent of more than Rs 50, 000 to deduct 5% of the rent paid to a resident landlord.

If your rent payment exceeds the specified amount, remember to comply.

How Exempt HRA be Calculated?

According to Section 10 (13A) of the Income Tax Act of 1961, read with Rule 2A of the Income Tax Rules, the House Rent Exemption will be the least of the three:

1. Actual HRA received.

2. Rent paid in excess of 10% of pay (Basic + Dearness Allowance + Commission (as a percentage of turnover accomplished by the employee)

3. 40% of salary (50% if live in a city, such as New Delhi, Kolkata, Chennai, or Mumbai).

Salary for the aforesaid purpose is defined as “Basic + Dearness Allowance + Commission (as a percentage of the employee’s turnover).” Employees are rarely given Dearness Allowance in the private sector.

For example, imagine your HRA is Rs. 360,000, your basic salary is Rs. 1100,000, and you live in Delhi with a monthly rent of Rs. 40,000.

• The actual HRA received is Rs. 360,000
• Rent paid in excess of 10% of salary (Basic + Dearness Allowance) is Rs. 370,000
• 50% of the salary is 550,000

So in this situation, your entire HRA would be exempted.

Use Income Tax HRA Calculator to Calculate HRA