Tax Talk: Tax on HRA and residence provided by employer
House rent allowance (HRA) is an allowance paid by employer to meet employee’s housing cost where an employee arranges for his own accommodation. Exemption under tax provisions has been provided for HRA which is the most sought after exemption by salaried employees. An employee can avail of this exemption if he resides in a rented house and rental payments are made by him.
The exemption is restricted to least of the three amounts –
* actual HRA received;
* rent paid less 10% of salary
* 50% salary if residential house is situated in metro cities and 40% of salary for non-metro cities.
The salary for calculating such exemption includes only basic salary and dearness allowance and excludes other allowances and bonus.
For availing of the exemption, an employee is required to submit necessary documents to the employer such as rent receipt or rent agreement with landlord. If the annual rent amount is more than Rs 1 lakh, the employee is also required to provide Permanent Account Number of the landlord. This requirement has been stipulated by the revenue authorities to verify the identity of landlord and to ensure authenticity of the transaction.
The exemption cannot be claimed if an employee stays in a house owned by him or does not actually incur any expenditure on rent.
Employer provided accommodation
Under this option, an employer does not pay any allowance to the employee for meeting housing expenses but arranges accommodation for the employee’s residence.
Such accommodation can be owned or leased by the employer. This benefit is treated as taxable perquisite under the income tax provisions and valued as per prescribed rules.
If the accommodation is owned by employer, the taxable value is –
* 15% of salary in cities having population more than 25 lakhs;
* 10% of salary in cities having population between 10 lakhs to 25 lakhs;
* 7.5% of salary in other areas
In case accommodation is leased by employer, the taxable value is minimum of the following amounts:
* 15% of salary in case of residential house and 24% for hotel accommodation;
* actual rent paid by the employer less recovery of rent from employee, if any
If the employer enters into separate agreements with the landlord for furniture and fixture hire charges, house maintenance charges etc, the same cannot be added to the rent (in the above formula) and is fully taxable. Tax exemption has been provided for hotel accommodation provided to employees on transfer to another location for an initial period of 15 days.
Actual tax workings can be done to determine the more beneficial option as the same will broadly depend upon various factors like salary structure of employee, house rent amount etc. HRA is generally more beneficial than employer provided accommodation, as bonus and other taxable allowances do not form part of salary for computing HRA exemption unless HRA/ rent paid is a very high proportion of basic (well over 50%).