HRA Tax Exemption for Rent Paid to Parents and Spouse

hra-tax-exemption-for-rent-paid-to-parents-and-spouse

HRA or House Rent Allowance tax exemption is available from rent paid to parents or spouse if the HRA tax exemption rules are adequately followed and adhered to. HRA tax exemption may get disallowed if the HRA tax exemption for such rent paid to parents or spouse claimed is found to be bogus or sham.

In this article, all the rules to claim HRA tax exemption from the rent paid to parents or spouse is discussed.


    Introduction

    One can claim a deduction for payment of house rent from his total income under the income tax law in India. However, before claiming the deduction, one should be aware of the legal provisions governing such deduction.

    Deduction for payment of rent is available under two provisions of the Income Tax Act, 1961

    1. Under section 10(13A): Under this section deduction for rent payment is allowed from the income of a person only if the individual receives House Rent Allowance from his employer and actually pays rent for accommodation.

    Since HRA is taxable as 'Salary' under the income tax law, only an individual who is in employment under an employer can claim the deduction under this provision. Remember, this deduction is allowed while computing the 'Income from Salary'. This is the reason the same is not visible in the ITR-1 form while filing the income-tax return in ITR-1.

    Thus, a self-employed person cannot claim a deduction for rent paid under this provision. Section 80GG is applicable in such a case.

    Similarly, if an employee receives remuneration from his employer but the components of salary do not include any house rent allowance then such a person cannot claim deduction under this section even if he is paying house-rent. Under such circumstances, he can claim deduction under section 80GG discussed hereinafter.

    2. Under section 80GG: The pre-condition to claim a deduction under this provision is that the person does not receive any house rent allowance and he pays house-rent.

    If an employee receives remuneration from his employer but the components of salary do not include any house rent allowance then such a person can claim deduction under this section 80GG if he pays house-rent.

    Similarly, a self-employed individual or a professional if pay house-rent for accommodation then such an individual can claim deduction under section 80GG.

    Deduction under this section is available under Chapter VI-A hence the same is visible on the face of the ITR-1 form while filing the income-tax return in ITR-1.

    Legal Provisions

    House rent allowance is taxable under the head salary.

    Exemption from HRA in respect of 'rent' paid is allowed under section 10(13A) and is regulated by Rule 2A.

    HRA is a taxable allowance against which exemption is allowed if rent is paid by the employee. Employers as a part of salary pay HRA to an employee to meet his cost of living for accommodation in the place of employment. However, it is not an obligation of the employer to pay such an allowance and is governed by the terms of employment.

    As per rule, the least out of the following three conditions is exempt from the House Rent Allowed received by the employee-

    (i)
    Actual HRA received
    (ii)
    50% (or 40%) of the salary if the rented house is situated in India
    (iii)
    Rent paid in excess of 10% of salary.
    In other words, it is Rent paid minus 10 percent of Salary

    'Salary' means Basic Salary or Pay and dearness allowances and a fixed percentage of commission on turnover.

    How the exemption u/s 10(13A) for rent payment is worded in the statute?

    Section 10(13A) of the Income Tax Act-

    Any specific 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.

    The essential ingredients of section 10(13A) are as follows-
    1. There must a receipt of a specific allowance commonly known as House Rent Allowance.
    2. The HRA must be received from the employer by the employee.
    3. The HRA is received for payment of rent.
    4. The rent must be paid for residential accommodation. If rent is paid for any other purpose, then deduction or exemption under this provision cannot be claimed.
    5. The residential accommodation must be occupied by the employee - with or without family. If the employee does not reside in the rented accommodation then also deduction cannot be claimed.
    The Explanation to section 10(13A) clarifies that the exemption under section 10(13A) shall not be available-

    1. If the residential accommodation occupied by the assessee is owned by him; in other words, an owner cannot pay rent to himself.

    2. No payment of rent is actually made for the accommodation occupied by the assessee.

    What Constitutes Rent for HRA exemption

    Though the exemption under section 10(13A) is allowed for payment of rent, however, the section itself does not define the term 'rent'.
    However, section 194I - which deals with TDS from rent payment defines the term rent. Taking a clue from that definition, it can be concluded that-

    "Rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of -
    a) land and building including land appurtenant to a building
    b) any plant and machinery or equipment
    c) any furniture and fittings.

    It is important to note that the above asset(s) may or may not be owned by the payee or landlord.

    Therefore, rent shall include all the payments made by the tenant or employee for the use of residential accommodation to the landlord.

    Hence, the payment towards maintenance charges shall also qualify for the exemption as it constitutes 'rent' under the income-tax law.


    Cases on HRA exemption


    HRA tax exemption for rent paid to the spouse

    As decided in the case of Bajrang Prasad Ramdharani vs ACIT ITAT Ahemdabad that for claiming HRA tax exemption, rent paid to spouse is valid if the twin conditions are satisfied-

    1. The residential accommodation is not owned by the assessee, and

    2. The assessee has actually paid the rent.

    Important: Even though after marriage, the female becomes better-half but still in the eyes of law continue to be 'Individuals' for all practical purpose, particularly for taxation laws. So long as it is not regarded and proved to be a 'colorable device' to evade tax and the residential accommodation or house property in question is actually and factually belongs to the wife within its legal meaning, then simply because rent is paid to own spouse cannot be meted out with disallowance. 

    However, remember that if the house is constructed or acquired by the husband (employee) but registered in the name of the wife and financed by the husband then the husband shall be deemed to be the owner and thus cannot pay rent to the spouse in this case. Even otherwise, the rent so paid shall be clubbed with the income of the husband or employee.


    HRA Exemption is allowed on actual payment of rent

    The HRA exemption is allowed only on actual payment of rent by the taxpayer. If there is no payment of rent, the HRA exemption under section 10(13A) cannot be claimed.

    Further, payment of rent to self is prohibited. In other words, one cannot pay rent to himself where the taxpayer is the owner of the house property.


    In the case of Commissioner of Income Tax (Central), Kanpur vs. Sri P.D.Singhania it was decided that in order to claim deduction under sub-section (13A) of Section 10 of the Act, the assessee should not reside in the accommodation which is owned by him and further, the expenditure should have been actually incurred on payment of rent. As in the present case, we find that the assessee was residing in his own house, there was no payment of rent, the provisions of sub-section (13A) of Section 10 of the Act was not attracted.

    Rent paid to mother

    HRA exemption can be claimed if the rent is paid to the mother provided the above-mentioned conditions are satisfied. In other words, the residential accommodation is not owned by the assessee and shall be owned by the parents or mother and the assessee has actually paid the rent.

    If you read the case of Mrs. Meena Vaswani Vs. ACIT you will find that in that case, the Tribunal did not allow the HRA exemption for payment of rent of mother.

    The Tribunal observed that the assessee was not staying with her mother which violates the condition that the rented accommodation must be occupied by the assessee and the assessee did not make any payment for the rent.

    Therefore, the grounds on which the HRA exemption was denied to the assessee does not give rise to the conclusion that HRA exemption cannot be claimed for payment of rent to the mother. 

    If the aforesaid conditions are satisfied then one can legally claim HRA exemption for rent paid to parents.
    It is strongly advisable that where the rent is paid to spouse or parents the landlord should file the Income Tax Return and declare the rental income.

    Payment of rent in Cash

    Though there is no bar in the mode of payment of rent to the landlord for claiming HRA exemption, however, it is advisable that payment of rent in cash should be avoided and the tenant should pay the rent through banking channels viz cheque payment, payment by online net banking, NEFT or RTGS or UPI.

    Payment through banking channels helps to trail the transactions and the assessee will be able to prove the source as well as payment during the assessment.

    Rent payment not declared to the employer

    Many times it happens that an employee fails to declare the rent payment to the employer and the same is not considered by the employer while computing the total income of the employee and the employer deducts income-tax from salary income without taking into account the rent paid by the employee which is otherwise eligible for tax exemption.

    As a result, the same is not reflected in Form 16 issued to the employee by the employer.

    It must be remembered that any deduction or exemption which is not considered by the employer in Form 16 does not mean that such a deduction or exemption is lost and the employee cannot ever claim the same. If the employee has the proof or evidence and is eligible for claiming the deduction or exemption then the employee has the legal right to claim the same in the return of income to be filed by the employee. 

    Form 16 is not a sacrosanct document to the deductions or exemptions available to an employee. It is a certificate that shows how much income tax was deducted by the employer during a particular financial year and what is the income computed by the employer for the deduction of such income-tax.

    Hence, rent payment not declared or considered by the employer can be considered by the employee himself at the time of filing of return. The employee can on his own claim the exemption in the ITR while filing his return of income.

    Rent paid for the family - staying out of the city

    Consider a case where Mr. Vinay is working in Delhi but his wife and son reside in Kolkata because his son is studying in IIM, Kolkata. His family has taken a house on rent in Kolkata which is paid by Mr. Vinay. They have a house in Delhi where Mr. Vinay resides.

    Mr. Vinay receives HRA from his employer.

    Can he claim an exemption for payment of rent against HRA?

    The answer is 'No'. The reason being to claim the exemption from HRA, the accommodation taken on rent must be occupied by the employee. Since Mr. Vinay is not staying in the rented house in Kolkata, no exemption from rent payment can be claimed by Mr. Vinay.

    Will it be different if Mr. Vinay occasionally visits Kolkata during leave and come to the rented house?

    The answer will remain the same. Normally, the residential accommodation from where the employee normally commutes to the office or place of employment is considered as the place of residence.

    Hence, in Mr. Vinay's case, rent paid for the family staying out of the city is not allowed for HRA exemption.

    Rent paid for the family not staying with the employee 

    Similar is the case even if both the houses - one house in which the employee resides and another one, a rented house, in which the family members reside - are in the same city.

    For example, Mr. Rajesh along with his wife and children are residing in Jaipur. Mr. Rajesh is working in a factory there. the house is owned by Mr. Rajesh.

    Since the house is small so he has taken a house on rent in the neighborhood area to accommodate his parents.

    He is not entitled to claim exemption from the HRA for the payment of rent. The reason being he is not occupying the rented house.

    Hence, rent paid for the family not staying with the employee even in the same city is not allowed.


    Tax Planning Tips: Here, in this case, Mr. Rajesh can save tax by claiming exemption from HRA if he and his wife with children move to a rented house and let the parents stay in the owned house.

    Flat maintenance payment

    Where the tenant or the employee resides in a rented flat but pays maintenance and other charges to the society, the same also constitutes rent and eligible for HRA exemption.

    For example, Mr. Champak is a salaried individual and living in a rented apartment in Delhi. Apart from the house rent, he pays the electricity charges, society maintenance charges, and parking fees. Although the bills for the above-mentioned expenses are generated in the name of the landlady, he makes the payment for those expenses. 

    Can he claim these expenses under HRA tax exemption over and above the rent payment?

    Yes, provided the landlady issued receipts for the same in the name of Mr. Champak or else the fact that he will pay those expenses must be properly included in the rent agreement. The payment should be towards an obligation and not gratuitous.

    PAN of the landlord 

    PAN of the landlord is mandatory to be quoted to the employer for TDS from salary purposes if rent payment exceeds Rs. 1 lakh in a year. If the landlord has no PAN, a declaration to that effect must be submitted to the employer.

    Please note that the PAN of the landlord is required only for filing of the declaration in Form 12BB to the employer for deduction of TDS from salary income. The same is not required for the filing of ITR-1.

    Rent paid to co-owners and joint owners

    The law states that if the assessee is the owner of the occupied property no exemption u/s 10(13A) will be allowed. It does not state the nature and control of ownership in the property. If an assessee is a co-owner of a house property then he can pay rent to other co-owner and can claim exemption.

    Circular renting of the house

    An employee owns a house property and lets out the same to his employer and the employer allotted the same to the employee and recovers rent on this account. HRA cannot be claimed in this case as the employee is the owner of the house.

    Is rent agreement mandatory for claiming HRA exemption

    The Income Tax Law does not provide for any rental agreement to be on record for claiming HRA tax exemption. However, it is desirable to have a rent agreement to prove the landlord-tenancy relationship. More so over, the rent agreement is not required to be submitted to the employer. The Circular only states about the submission of rent receipts and not any rent agreement. Asking for rent agreement by the employer is crossing the jurisdiction by the employer.

    The rent agreement must mention the premises rented to the tenant and the utility charges or property taxes etc. to be borne by the tenant.

    Even if the rent is paid to parents or spouse then also it is advisable to have a formal rent agreement between the landlord and tenant.

    Can exemption be claimed for shared accommodation

    The agreement must mention the number of tenants, co-sharing the flat, ratio on which rent will be paid and how the utility bills are to be divided.

    Rent payment at the normal market rate

    If rent is paid to parent or spouse it should not be more than normal market rate prevailing in the locality for the un-related person.

    TDS on rent

    If the monthly rent exceeds Rs. 50,000 per month then every individual shall deduct TDS @ 1 percent from the rent payment.

    However, the deduction or non-deduction of TDS on rent payment of more than Rs. 50,000 does not affect the HRA tax exemption.

    Here the term rent means all the payment which a tenant pays to the landlord for the use of the house. It shall include rent, maintenance charges, etc. and the limit of Rs. 50,000 shall be determined accordingly.


    Legal notes:

    Meaning of Salary - For the purpose of computing the HRA exemption under section 10(13A), the term 'salary' is defined in Explanation (i) to Rule 2A of Income Tax Rules, 1962 as-

    “Salary” shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule.

    The Fourth Schedule is found in the Income Tax Act, 1961.

    The Part A Rule 2(h) of the Fourth Schedule defines the term salary as -

    'Salary' includes dearness allowance if the terms of employment so provide but excludes all other allowances and perquisites.

    Does salary includes 'Bonus'

    Bonus can not be regarded as falling within the scope of expression 'salary' as defined in Rule 2(h). Rule 4(a) and Rule 4(b) contains a clear indication that the expression salary takes in only periodical payments made by the employer to the employee during a year by way of remuneration. [CIT vs B. Ghosal (Kerela HC) (1980) 25 ITR 744 Ker] decided on 27.02.1980.

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