INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME ( HOUSE RENT ALLOWANCE - HRA)

Section : 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

Sub-Clause (13A) any special 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 (9) having regard to the area or place in which such accommodation is situate and other relevant considerations.]

10[Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—

(a)  the residential accommodation occupied by the assessee is owned by him ; or

(b)  the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him ;]

9. Rule 2A prescribes the quantum of exemption available, which will be the least of the following :

	Bombay/Calcutta/Delhi/Madras		Other Cities
	■	Allowance actually received	■	Allowance actually received
	■	Rent paid in excess of 10% of salary	■	Rent paid in excess of 10% of salary
	■	50 per cent of salary	■	40 per cent of salary

'Salary' for this purpose includes basic salary as well as dearness allowance if the terms of employment so provide. It also includes commission based on a fixed percentage of turnover achieved by an employee as per terms of contract of employment but excludes all other allowances and perquisites. In view of Explanation (ii) to rule 2A, basic pay, dearness allowance and commission are determined on 'due' basis in respect of the period during which rental accommodation is occupied by the employee in the previous year. Thus, emoluments of a period other than previous year are not to be considered, even though such amount is received (as well as taxed) during the previous year. Again, emoluments of the period during which rental accommodation is not occupied in the previous year are left out of computation. It is important to note that where rent paid is 10 per cent or less than 10 per cent of salary, no exemption will be admissible. Again exemption is denied where an employee lives in his own house, or in a house for which he does not pay rent.

Salary includes dearness pay - For the purposes of calculating the house rent allowance that would be exempt under rule 2A, the term ‘salary’ includes ‘dearness pay’ also—Circular : No. 90 [F. No. 275/79/72-ITJ], dated 26-6-1972.

Expenditure must have been actually incurred - It is necessary for granting the exemption under section 10(13A) that the employee should have actually incurred the expenditure on rent. For purposes of deduction of tax, therefore, the disbursing officer should ensure that the employee concerned has in fact incurred the expenditure on rent. The payment of rent should be verified through rent receipts in the cases of all employees—Letter : F. No. 12/19/64-IT(A-I), dated 2-1-1967.

Living in own house or in any house rent-free - House rent allowance paid to a person, who is living in his own house or in a house for which he does not actually pay any rent, is not exempt from tax in any circumstances—Letter : F. No. 12/19/64-IT(A-I), dated 2-1-1967.

Production of rent receipts - Only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee subject to the limits laid down in rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the house rent allowance or any portion thereof 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 house rent allowance upto Rs. 3,000 per month will be exempted from production of rent receipt. It may, however, be noted that this concession is only for the purpose of tax deduction at source, and, in the regular assessment of the employee, the Assessing Officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that the employee has incurred actual expenditure on payment of rent - Circular : No. 9/2003, dated 18-11-2003/[Para 5.2-(9)].