HRA in the eyes of I-T dept & individuals

It’s perfect to stay with your parents and claim tax exemption on HRA

MUMBAI: As life goes on, traditional institutions like the joint family are on their way out. Staying with parents is definitely not the in-thing. It’s so uncool, they say.

But there are exceptions to what has become the rule, and Rishi Bose, who lives in Mumbai, is one of them. He stays with his parents, pays them rent and even claims tax deduction on it.

Rishi, as a part of salary, gets a house rent allowance (HRA) of Rs 15,000 per month. Employers pay an HRA to employees every month to help employees meet the cost it takes to rent a house.

Rishi pays the entire HRA he receives to his dad as rent. His dad has always insisted on running the house. Rishi does not like the idea of not contributing anything, and so he has convinced his dad to accept a rent from him. Rishi’s dad, while filing his tax returns, showed the rent he received from his son as income.

As per the Income-Tax Act, individuals aged over 65 are senior citizens and senior citizens don’t have to pay any tax, if their income is less than or equal to Rs 1,85,000.

Other than this, senior citizens, like others, can claim an aggregate deduction of Rs 1,00,000 under Sec 80 C. Given these provisions, Rishi’s dad, who was over 65, doesn’t have to pay any tax.

The tax calculations on Rishi’s side are slightly more complicated. He is allowed to claim a tax exemption under Section 10 (13A) of the I-T Act.  The exemption is restricted to a minimum of:  The actual HRA that he gets. The actual rent paid, less 10% of his salary, where salary includes the basic salary plus dearness allowance.

50% of the salary if the rented house is situated in Mumbai, Chennai, Kolkata or Delhi, and 40% of the salary in other cases.

The HRA that an individual receives, over and above, this is included as a part of the taxable income. In Rishi’s case, he receives an HRA of Rs 15,000 per month. His basic plus dearness allowance is Rs 40,000 per month. Hence, the actual rent paid less 10% of the salary would be equal to Rs 11,000 per month (Rs 15,000 - 10% of Rs 40,000).

Since Rishi lives in Mumbai, for calculating his tax exemption, we would consider 50% of his salary. This comes to Rs 20,000. As we see clearly from the calculation, the minimum amount from the three specified conditions comes to Rs 11,000.

And hence, Rishi would be allowed a total deduction of Rs 1.32 lakh (Rs 11,000 x 12).  For the remaining amount of HRA, i.e., Rs 4,000 per month (or Rs 48,000 for the year), tax will have to be paid.

To claim this exemption, Rishi would have to submit a rent receipt issued by his father. In other cases, a copy of the house lease agreement can also be submitted to claim an exemption. A proof of the rent paid is required only if the rent is higher than Rs 3,000 per month.

As is clear from this case, an individual can pay rent to his parents and claim a tax deduction from the salary. So the next question crops up, “Can one pay a rent to one’s spouse and claim exemption?”. The answer is no.

The logic here is that a husband and wife are supposed to stay together. Well, as the institution of marriage breaks down, it would be interesting to see the impact it would have on the income-tax front.

(The example is hypothetical)