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Ashutosh Rupak, 30, is a marketing communication professional from Delhi who stayed with his family in a rented accommodation. Since his new office was far from home, he decided to shift nearby in a rented studio apartment. He wanted to claim HRA tax exemption for his family’s rented accommodation, while he stayed in a different house on rent. Is it legal to that? Can it invite taxman scrutiny?

House Rental Allowance or HRA is a part of the salary paid by the employer to suffice for the employee’s accommodation cost of living in that city. This component of one’s salary isn’t completely taxable, subject to certain conditions.

Under Section 10 (13A) of the Income Tax Act, 1961, any allowance specifically granted to an employee to meet the expenditure actually incurred on payment of rent for a residential accommodation occupied by him/her shall be exempt from tax to the extent prescribed.

Place of residence crucial

The place of residence becomes crucial since its an active component to calculate HRA deduction. For example, Mumbai, Kolkata, Delhi or Chennai, the tax exemption on HRA is 50% of the basic salary, while for other cities it is 40% of the basic salary.

“The primary condition to claim HRA deduction is that you receive one from your employer and you also pay rent. But if the house is not actually occupied by the assessee, you will not get benefit of HRA since the section specifically says payment of rent in respect of residential accommodation occupied by the assessee,” Gauri Chadha, tax expert, said.

Therefore, in order to claim tax exemption, you must occupy the house and also pay the rentals for the same.

But what if I live in a different rental premise and claim HRA for my parents’ rental home, both in the same city? Will it invite any income tax scrutiny?

Disallowance of HRA

“The department might not issue scrutiny notice if the house is not occupied by the assessee and he is claiming HRA because the chances are negligible that the department will get to know this fact,” Chadha asserted.

However, if the case falls under scrutiny due to some other reason this issue might come up resulting in disallowance of HRA, she added.

Meanwhile, if your rental payment exceeds Rs 1 lakh annually, make sure to provide the landlord’s PAN while claiming tax deduction. Landlords without a PAN should present you with a declaration referring to  circular No. 8/2013 dated October 10, 2013. For tenants paying rent to their NRI landlords – always remember to deduct TDS of 30% before paying rent.

It should also be noted that tax benefits on HRA and home loan are two separate things. One can claim both the HRA as well as home loan interest deduction at the same time.