House Rent Allowance - HRA

What is House Rent Allowance?

House Rent Allowance (HRA) is one of important component of Salary package given to employee by their employer. Its allowance given by employer to its  employee to meet employee's expense towards renting an accommodation. 

Tax exemption under Income Tax Act for HRA is allowed to salaried persons who are occupying a rented accommodation. It is being regulated by 2A of Income Tax Rules, 1962 and Section 10(13A) of the Income Tax Act, 1961.

HRA can be exempted only in following conditions:

• The employee must not own the property in which he / she is residing.
• Employees must be paying rent for the accommodation.
• Such rent must be more than 10 per cent of his/her salary.

Note: Employee can not exempt Rent paid by him / her if HRA component is not their in his / her salary package. In case Self employed professionals can claim the benefits on house rent expenses under section 80GG.

How to Calculate HRA Tax emxemption?

Least of following three will be exempt from Income Tax:

• 50% of (Basic Salary + DA) in case of residing in Metro cities (Delhi, Mumbai, Chennai and Kolkata) or 40% of Basic Salary + DA in case of other cities.
• Actual HRA received by employee from employer as part of salary.
• Actual rent paid by employee less 10% of Basic Salary.

Examples of Tax Exemption on House Rent:

Example 1:Person X earns a basic salary of Rs. 40,000 per month and rents an apartment in Delhi for Rs. 20,000 per month.

In this case, no Income Tax exemption on rent paid by person X because there is no HRA component mentioned in his / her salary package.

Example 2:Person X earns a basic salary of Rs. 40,000 per month, Rs. 25,000 per month as HRA. He / She pays rent of Rs. 20,000 for an apartment in Delhi.

In this case, the least value of following three will be exempted from Income Tax:

50% of Basic Salary : 20,000/-

Actual HRA : 25,000/-

Actual Rent - 10% Basic Salary : 20,000/- - 4,000/- = 16,000/-

Example 3:Person X earns a basic salary of Rs. 40,000 per month, Rs. 25,000 per month as HRA. He / She pays rent of Rs. 22,000 for an apartment in Pune.

In this case, the least value of following three will be exempted from Income Tax:
40% of Basic Salary : 16,000/-
Actual HRA : 25,000/-
Actual Rent - 10% Basic Salary : 22,000/- - 4,000/- = 18,000/-

FAQ on HRA:

Can I pay rent to my parents or spouse to avail HRA benefits?

You can pay rent to your parents, however, they need to account for the same under’Income from House property’ and will be entitled to pay tax for the same.

On the other hand, you cannot pay rent to your spouse. In view of the relationship when you take up residence together, you are expected to do so and hence such a transaction does not bear merit under tax laws.

Can I simultaneously avail tax benefits on my home loan and HRA?

The tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other.

As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under income from other sources.

Do I need to submit any proof for my HRA claim?

You need to submit proof of rent paid through rent receipts. It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it etc.

If rent paid is more than 15,000/- then PAN of owner must be required.

Capital Gain

What is Capital Gain?

Profits or gains arising from the transfer of a capital asset made in a previous year is taxable as capital gains under the head “Capital Gains” in current assessment year. 
The definition of Capital Asset and Transfer are important and explained below.

Capital Asset:

Capital Assets are the properties of any kind (except below) held by a person whether or not connected with his / her business or profession.

• Stock-in-trade, consumable stores or raw-material held for business or profession.
• Items for personal effects like furniture, motor vehicles etc. (Jewellery [ including gold, silver, stone], Archaeological Collections, Drawings, Paintings, Sculptures or any work of art are Capital Assets.)
• Agriculture Land in India - it should not be situated in area within the jurisdiction of municipality, notified area committee, town area committee , cantonment board which has a population of not less than 10,000.
• Few bonds issued by Government of India (6.5% Gold Bonds 1977, 7% Gold Bonds 1980, National Defence Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government, Gold Deposit Bonds under Gold Deposit Scheme, 1999 notified by the Central Govt).

Capital Assets are classified under two categories (Short Term & Long Term) depends upon the length for which the capital asset was held before the transfer.

Short Term Capital Asset: Capital Assets held for 36 months or less than are treated as Short Term Capital Asset. However shares of a Company, the units of Unit Trust of India or any specified Mutual Fund or any security listed in any recognized Stock Exchange are to be considered as Short Term Capital Assets if held for twelve months or less.

Long Term Capital Asset: Capital Assets held for more than 36 months are treated as Long Term Capital Asset. However shares of a Company, the units of Unit Trust of India or any specified Mutual Fund or any security listed in any recognized Stock Exchange are to be considered as Long Term Capital Assets if held for more than twelve months.

Transfer:

The word transfer defined as below under Income Tax act section 24(7):

• Sale of asset.
• Exchange of asset.
• Relinquishment of capital asset (surrender of asset).
• Extinguishment of any right on asset.
• Compulsory acquisition of capital asset under any law.

Note: Capital asset given as a gift or transferred through will not considered as transfer.

Types of Capital Gain:

Capital Gains are classified based on type of Capital Assets. Its important to under its classification to calculate the Capital Gain Tax. There are two types of Capital Gains:

Short Term Capital Gain:

Transfer of a Short Term Capital Asset gives rise to Short Term Capital Gains (STCG). Its calculated as below:

STCG = Full Value of Consideration - (Cost of Acquisition + Cost of Improvement + Cost of Transfer) - (Exemption provided by sections 54B, 54D, 54G).

Long Term Capital Gain:

Transfer of a Long Term Capital Asset gives rise to Long Term Capital Gains (LTCG). Its calculated as below:

LTCG = Full Value of Consideration received or accruing - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer) - (Exemption provided by sections 54, 54B, 54D, 54EC, 54ED, 54F & 54G).

Where, 
Indexed Cost of Acquisition = Cost of Acquisition X (CII of year of transfer / CII of year of Acquisition)

Indexed Cost of  Improvement = Cost of Improvement X (CII of year of Transfer / CII of year of Improvement)

CII - Cost Inflation Index.

Full Value of Consideration:

Full value of consideration includes the whole or complete sale price or exchange value or compensation including enhanced compensation received in respect of capital asset in transfer. 
The following points are important to note in relation to full value of consideration:

• The consideration may be in cash or kind.
• The consideration received in kind is valued at its fair market value.
• It may be received or receivable.
• The consideration must be actual irrespective of its adequacy.

Cost of Acquisition:

It includes any expense at the time of acquiring capital asset under transfer, i.e., the purchase price, expenses incurred up to acquiring date in the form of registration, storage etc. It also includes expenses incurred on completing transfer.

Cost of Improvement:

It includes the capital expenditure incurred by assesse for making any addition / improvement (Protecting or Curing the title) in the Capital Asset. In other words all expenditure which are incurred to increase the value of Capital Asset.

Cost of Transfer / Expenditure on Transfer:

It includes the expenditure incurred wholly and exclusively for transfer of capital asset. Examples of expenditure on transfer are the commission or brokerage paid by seller, any fees like registration fees, cost of stamp papers, travelling expenses and litigation expenses etc. 

CII - Cost Inflation Index:

Its used while calculating Indexed Cost of Acquisition and Indexed Cost of Improvement. CII value for each financial year defined as below:

Financial Year	Cost Inflation Index
1981-82	100
1982-83	109
1983-84	116
1984-85	125
1985-86	133
1986-87	140
1987-88	150
1988-89	161
1989-90	172
1990-91	182
1991-92	199
1992-93	223
1993-94	244
1994-95	259
1995-96	281
1996-97	305
1997-98	331
1998-99	351
1999-2000	389
2000-01	406
2001-02	426
2002-03	447
2003-04	463
2004-05	480
2005-06	497
2006-07	519
2007-08	551
2008-09	582
2009-10	632
2010-11	711
2011-12	785

Capital Gain Tax:

Capital Gain Tax calculated on Capital Gain. There are two type of Capital Gain Tax:

Long Term Capital Gain Tax:

Long Term Capital Gain Tax will be calculated as 20% of Long Term Capital Gain.

Short Term Capital Gain Tax:

There will be no separate formula for calculating Short Term Capital Gain Tax. Short Term Capital Gain (STGC) will be included in Total Income and will be taxed as per Income Tax Slab / Rate of individual for assessment year.

Examples of calculating Capital Gain & Capital Gain Tax:

Example 1:
Person X purchased a house property for Rs. 1, 00,000 on 31st July 2000. Constructed the first floor in March 2003 for 1, 10,000. The house property was sold for Rs. 5, 00,000 on 1st April 2005. The expenses incurred on transfer of asset were Rs. 10,000.

In this case property possessed by person more than 36 months, Long Term Capital Gain (LTCG) will be applied.

LTCG = Full Value of Consideration received or accruing - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer)

Full Value Consideration = 5,00,000/-
Indexed Cost of Acquisition =  Cost of Acquisition X (CII of year of transfer / CII of year of Acquisition) = 1,00,000 X (497/406) = 1,22,414/-
Indexed Cost of Improvement = Cost of Improvement X (CII of year of Transfer / CII of year of Improvement) = 1,10,000 X (497/447) = 1,22,304/-.
Cost of Transfer = 10,000/-

LTCG = 5,00,000 - (1,22,414 + 1,22,304 + 10,000) 
        = 2,45,282/-

Long Term Capital Gain Tax = 20 % LTCG = 49,056/-.

Example 2:
In above example consider, Person X purchased property on 31 January 2003.

In this case property held by person less than 36 months, so Short Term Capital Gain (STCG) will be calculated.

STCG = Full Value of Consideration - (Cost of Acquisition + Cost of Improvement + Cost of Transfer)

STCG = 5,00,000 - (1,00,000 + 1,10,000 + 10,000)
        = 2,80,000/-.

This LTCG included in Total Income of person and Income Tax will be calculated based on Income Tax Slab / Rate for individual for particular assessment year.