Over the past few days, Anita Basu and Kritika Ghosh have been poring over their last year’s income returns to determine the investments they need to make this year to save on taxes.

But they are fretting over the adjustments they need to make to account for an annual salary increment and the mandatory deductions thereon.

As part of the increment, their employer increased different components of each one’s annual salary package: basic salary, house rent allowance (HRA), medical and other allowances.

Basu and Ghosh stumbled over the deductions they could actually claim on HRA and contributions to employees’ provident fund so that they could get a fair idea of what their taxable income would be and how much they needed to invest to save on taxes.

Of all the elements in a salary package, HRA plays an important role in the overall tax planning of a salaried person. This allowance is available to salaried individuals only. HRA forms an integral part of one’s salary package under section 10(13A) of the Income Tax Act and an individual can claim tax exemption on the amount of salaried income paid towards house rent.

Let’s make it clear

A few points must be made clear here. First, HRA should form part of a salary package. According to the Income Tax Act, salary refers to that income which involves an employee-employer relationship. Hence, unless it is an employee-employer relationship, no tax exemption is available on any house rent allowance.

Second, the actual rent paid should be at least 10 per cent more than the HRA received. The tax exemption on the excess amount paid towards rent can be claimed by furnishing actual rent receipts.

One doesn’t require to furnish rent receipts if the house rent is less than Rs 3,000 a month.

However, the exemption is limited to the minimum of the following:

• The actual HRA one gets,

• The amount of rent actually paid which is in excess of 10 per cent of one’s basic salary plus dearness allowance, and,

• 50 per cent of basic salary if one is staying in a metro city (Calcutta, Chennai, Delhi and Mumbai) and 40 per cent for non-metro cities.

Parents as landlords

• Basu and Ghosh stay with their parents/families and get HRA as part of their salary. Can they claim exemption on rent given to their parents?

Yes, they can. Staying with parents and paying them a rent on a monthly basis makes the parents landlords. The parent, in whose name the house is registered,

can give a receipt against the rent. This rent receipt can be produced with the employer to claim tax deduction on HRA received. However, the parent who is issuing the receipts should show this rent income as ‘income from house property’ in his or her income tax return, otherwise it would become ‘black money’ and may entail litigation with the tax department in future.

While you can pay rent to your parents to claim HRA exemptions, you can’t pay rent to your spouse. Taxmen consider this a swindle.

Spouses are meant to stay together without a commercial relationship between them.

Twin benefits

• But can one claim tax exemptions on housing loan and HRA at the same time? After all, housing loans have become a more efficient vehicle to save tax than other tax-saving instruments.

Yes, tax exemptions on both housing loan and HRA can be claimed simultaneously, but under certain conditions.

While HRA benefits can be claimed under section 10(13A), principal repayment up to Rs 1 lakh on a home loan can be claimed under section 80C and interest payment up to Rs 1,50,000 on a housing loan can be claimed under section 24.

Though tax deductions are available on HRA and housing loan under different sections of the Income Tax Act, the HRA benefit is given to a salaried person for staying in a rented accommodation. So, once you own a house at a commutable distance from your place of work, you no longer need to stay in a rented place, it is presumed.

Therefore, the HRA benefit stops accruing. However, if your employer is convinced that your house (owned), even though located in the same city as your workplace, is too far away to commute, you may be allowed to claim tax exemptions both on HRA and home loan.

Away from home

• What if the house is in another city?

If you take a loan to build a house in a city other than where you are working, you will be entitled to tax benefits on repayment of home loan principal (u/s 80C) and interest (u/s 24) and HRA as well. Such a property will be regarded as self-occupied if your parents live there.

If you buy a property for commercial purposes, such as renting it out, you still can claim the tax benefits on home loan and HRA. But, you will have to show the rent income from that property in your tax return. This property can be in the same city as your workplace.

While showing the ‘income from house property’ in your tax return, you can straight away get a 30 per cent standard deduction (from the rental income) for property tax, repair and maintenance costs.

Tax Token: The house rent allowance one gets in salary is not totally tax exempt, a part of it can be taxable

Salary structure:
Basic salary = Rs 30,000 per month
Dearness Allowance = Nil
HRA = Rs 15,000 per month.
Rent paid = Rs 12,000 per month

HRA computation:
HRA received=50% of basic salary = Rs 15,000 per month
Rent paid in excess of 10% of basic salary=(Rs 12,000-Rs 3,000 =) Rs 9,000 per month.
HRA exemption = Rs 9,000 per month
HRA taxable = (Rs 15,000-Rs 9,000 =) Rs 6,000 per month.