Section 10(13A) of the Income Tax Act provides for Exemption on HRA. The Income Tax Act exempts a part of HRA under section 10(13A) read with 2A, with some specific conditions. In which city the Assessee is living will also define the amount of exemption eligible under section 10(13A). There is also a special exemption HRA clause for Supreme Court and High Court Judges. Section 10(13A) of the Income Tax Act is very famous provision among the salaried employees.
Section 13(13A) HRA Exemption Limit
Any special allowance specifically granted to an employee by his employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee, is exempt to the extent of least of the following:
- Actual amount of such allowance received in respect of the relevant period
- Rent paid over 10% of salary [Rent paid – 10% of salary
- an amount equal to 50% (where such accommodation is situated at Mumbai, Kolkatta, Delhi or Chennai) or 40% (where such accommodation is situated at any other place) of Salary.
Salary Definition – Section 10(13A) Income Tax Act
Salary = Basic Pay + D.A. (If form part of retirement benefit) + Commission (If it is based on specific % of turnover).
What salary includes – Section 10(13A) Income Tax Act
‘Salary’ includes Basic pay, dearness allowance, if the terms allow, includes commission, but excludes all other allowances and perquisites. However, the Supreme Court has held that commission to be paid to an employee at fixed percentage of turnover earned by him as salary. [Gestetner Duplicators (P) Ltd. v. C.I.T. (1979) 117 I.T.R. 1].‘Relevant period’ means the periods during which the said accommodation was occupied by the assessee during the previous year.
Retrospective Exemption – Section 10(13A) Income Tax Act
By virtue of the Taxation Laws (Amendment) Act, 1984 applicable with retrospective effect from 1.4.1976, exemption is denied where an employee lives in his own house, or in a house for which he does not pay any rent or pays rent which does not exceed 10% of salary.
HRA To SC Judges – Section 10(13A) Income Tax Act
House rent allowance to High Court and Supreme Court Judges: Under their service conditions the house rent allowance paid to them is exempt from income-tax w.e.f. 1.4.1975.
Documents – Section 10(13A) Income Tax Act
Employees have to produce receipt for rent paid to satisfy the taxation authorities to substantiate his claim. However, this receipt is not required to be deposited by employees paying rent upto ` 3,000 per month. However it should be noted that non-production is only for the purpose of tax deduction. But at the time of assessment AO can ask to produce rent receipt. (Circular No. 9/2003, 18.11.2003).
Section 10(13A) Income Tax Act Illustration
The above section is explained with the held of this example illustration problem.
Mr. B who lives in Lucknow, gets the following emoluments during the previous year ended on March 31, 2017. Emoluments of 10 months from X Ltd.: Basic Salary Rs.5,000 P.M. dearness pay forming part of the basic pay Rs.500 P.M. and house rent allowance Rs.1,000 P.M. Emoluments of 2 months from Y Ltd.: Basic salary Rs.6,000 P.M.; house rent allowance Rs.2,500 P.M. and Rs.20,000 being Commission @ 2% of sales achieved by Mr. B (Sales target achieved by him was Rs.10,00,000 during this period).
One month salary due from Y Ltd. during 2016-17 is received by him in April 2017. He pays Rs.3,000 per month as house rent through out the previous year. Determine the amount of house rent allowance chargeable to tax for the assessment year 2017-18.
X Ltd.: House rent allowance, exempt from tax, shall be the least of the following:
- Rs.2,200 per month (being 40% of salary i.e. Rs.5,000 + Rs.500);
- Rs.1,000 per month (being the actual HRA)
- Rs.2,450 per month [Being the excess of rent paid over 10% of salary i.e. Rs.(3,000 – 550) per month]. Rs.1,000 per month, being the least shall be exempt from tax.
Since, there is a possibility of change in any of the above factors during the previous year, exemption for HRA should not always be calculated on annual basis. As long as there is no change in any of the above factors it can be calculated together for that period. Whenever there is a change in any of the above factors, it should be separately calculated till the next change.