House Rent Allowance (HRA) is a component of salary towards expenses relating to accommodation costs. The least of the following is allowed as exemption while claiming HRA:
- Actual HRA received by the employee
- 50 % of salary if the rented property is situated in Mumbai, Delhi, Kolkata and Chennai
- 40 % of salary* for all cities other than above
- Actual rent paid less than 10% of salary*
^ where salary = Basic +Dearness Allowance
So what are the do’s and don’ts that you must keep in mind?
Have a valid rent agreement
You must have a valid rental agreement. The rent agreement must mention all the relevant details such as the amount of monthly rent, the period of rent agreement, any utility bills to be paid by you, etc. Ensure that there is a signed agreement between you and the landlord, even if they are your parents. The agreement must mention the premises rented by you; other charges such as utility or property tax are payable.
Flat sharing scenario
In the case of shared accommodation, along with the details in the rent agreement, you must mention the number of tenants co-sharing the flat, the ratio in which such rent is shared.
Avoid cash payments
Make your rent payments preferably via banking channels instead of cash. Using banking channels helps to provide an electronic trail of money for the transactions that occurred.
You must ask for a receipt for the rent paid every month irrespective of the channel used for making payments. Also, it is mandatory to furnish rent receipts to the employer for claiming HRA exemption for the monthly rent paid more than Rs.3000 per month.
Landlord’s PAN if payment exceeds Rs. 1 Lakh
In addition to rent receipts, if your payment exceeds Rs. 1 lakh annually, then it is mandatory for you to provide the PAN of your landlord to your employer to avail the full benefit of HRA exemption. It helps you to lower your TDS deduction.
Declaration by the landlord
If PAN is not available, then your landlord must be willing to give you a declaration to this effect. Confirm this before taking the house on rent so that you can avail the benefit of HRA exemption from your employer. Along with the declaration, you also need to obtain ‘Form 60’ duly filled by your landlord if PAN is not available. You need to submit these to your employer as well.
Mismatch in salary income on not providing landlord’s details
If you do not provide the PAN of your landlord, you cannot claim tax exemption for HRA from your employer while withholding TDS on salary. Even though the Income Tax Act does not restrict the employee from claiming HRA tax exemption, yet, there will be a mismatch in the salary income reported in Form 26AS by your employer vis-à-vis stated by you in your ITR. This may prompt the department to send a communication seeking a response regarding the mismatch.
Difference in the amount stated in the agreement against the amount actually paid
There might be circumstances where an individual pays higher rent than that mentioned in the rental agreement, which is adjusted by payment in cash. If that happens, tax exemption will be calculated only based on the rent receipt furnished by the employee mentioning the amount paid. Any amount paid over and above the rent receipt shall not be considered for exemption by the employer.
Residence taken in the house mentioned
One must physically reside in the house mentioned while claiming HRA exemption. If your parents are landlords, make sure that they include the rental income while filing their returns.
Penalty on not depositing TDS
Remember to deduct TDS @ 5% from the rent paid to your landlord if you pay rent above Rs. 50,000 per month. Interest at 1% per month is charged if you forget to deduct TDS and 1.5% per month where TDS is deducted but not deposited. Additionally, It also attracts a penalty of Rs 200 per day for the period of delay.
Meeting with rental costs and saving money is one of the toughest things to do, especially for those who live in Tier 1 or 2 cities, having proper knowledge of HRA benefits and other tax-saving investment benefits will provide you easy and simple ways of saving your hard-earned money.
Now that you know what HRA is and what are the dos and don’ts, it is expected that you make the best use of it to plan your exemptions and deductions through HRA and other tax-saving investments well in advance of the assessment period