House rent allowance (HRA): Under Section 10 (13A) of the Act, HRA is exempt from income tax to the extent prescribed in Rule 2A of the Income Tax Rules, 1962, which stipulates that the least of the following amounts is exempt:
- The actual amount of HRA
- The actual rent paid in excess of one-tenth of the salary
- If the accommodation is situated in Mumbai, Kolkata, Delhi or Chennai, 50% of the salary
- If the accommodation is situated in any other place, 40% of the salary
But Following Points Should Be Taken into Consideration:
- Salary includes DA but excludes all other allowances and perquisites.
- Only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee qualifies for exemption from income tax. Thus, HRA granted to an employee residing in a house or flat owned by him is not exempt.
- The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the HRA or any portion from the total income of the employee.
- Though incurring actual expenditure on payment of rent is a pre-requisite for claiming deduction under Section 10(13A), it has been decided as an administrative measure that salaried employees drawing HRA up to Rs 3,000 per month will be exempt from production of rent receipt. However, this concession is only for the purpose of tax deducted at source. In the regular assessment of the employee, the assessing officer (AO) will be free to make inquiries to satisfy himself that the employee has incurred actual expenditure on payment of rent. The assessee must produce such a rent receipt.
- If the annual rent paid by the employee exceeds Rs 1,80,000 per annum, it is mandatory for the employee to report the Permanent Account Number (PAN) of the landlord to the employer. In case the landlord does not have a PAN, a declaration by the landlord along with his name and address should be filed by the employee.