SECTION 10(13A) l house rent allowance

80. Exemption of house rent allowance under clause (13A) - Eligibility and computation

clarification 1

1. I am directed to invite reference to this Ministry’s letter No. F. 12/19/64-IT (A-I), dated 2-1-1967 [Clarification 2] wherein the manner in which the house rent allowance is to be treated as exempt from income-tax under section 10(13A) read with rule 2A of the Income-tax Rules, was explained.

2. As per rule 2A “salary” has the same meaning as assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule to the Act, i.e., @ “salary” includes dearness allowance if the terms of employment so provide but excludes all other allowances and perquisites. A question has arisen about the treatment to be given to the element of “dearness pay” in relation to rule 2A insofar as Government servants are concerned. With the issue of orders in the Government of India, Ministry of Finance (Department of Expenditure), O.M. No. F. 1(34) E-II(B)/68, dated 18-1-1969, “dearness pay” is considered as “pay” for purposes of pension and gratuity and compensatory allowance (including house rent allowance, etc.) in the case of Central Government servants. It is, therefore, clarified that for the purposes of calculating the house rent allowance that would be exempt under rule 2A, the term “salary” includes “dearness pay” also. Where State Government servants are being paid “dearness pay” as in the case of Central Government employee, the clarification given above will apply.

3. The above clarification may please be brought to the notice of all Disbursing Officers and State Undertakings under the control of the State Government; this may be kept in view, inter alia, for calculating income-tax to be deducted at source from “salaries”.

Circular : No. 90 [F. No. 275/79/72-ITJ], dated 26-6-1972.

CLARIFICATION 2

1. Reference is invited to the Central Board of Direct Taxes letter F. No. 12/19/64-IT(B), dated 22-2-1966 [Clarification 3], wherein it was intimated that the house rent allowance given at flat rates may be treated as exempt from income-tax without verification of the fact whether the employee concerned had paid any house rent and the allowance exempted is less than the difference between the actual expenditure on the house rent and 10 per cent of the salary of the employee. These instructions were applicable for the financial year 1964-65 only. As the system of paying house rent at flat rates to Central Government employees has since been withdrawn, these instructions are no longer in operation and may, therefore, be treated as cancelled.

2. Section 10(13A) exempts from tax only the allowance granted by the employer to meet expenditure already incurred on payment of rent for the residential accommodation occupied by the employee. The limits for the purposes of exemption of house rent allowance under section 10(13A) have been laid down in rule 2A. Though for purposes of grant of house rent allowance, a rent receipt may not be insisted upon by Government, 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.

3. A reference is also invited to the Finance Ministry’s letter F. No. 12/19/64-IT(B), dated 8-1-1965, forwarding extracts of section 10(13A) and rule 2A relating to exemption of house rent allowance from income-tax. It has come to the notice of the Finance Ministry that for purpose of working out the exempted amount of house rent allowance the limits laid down in rule 2A are not taken into consideration and the entire house rent allowance is being treated exempt from income-tax by some disbursing officers. The amount of house rent allowance, which is to be treated as exempt from income-tax, has to be worked out in the following manner:

EXAMPLE 1 : Persons getting a salary of Rs. 600 p.m. and house rent allowance of Rs. 90 p.m., the expenditure incurred for rent of the house being Rs. 160 p.m.

As per clauses of rule 2A :

a. Rs. 90; b. Rs. 100 (expenditure on rent in excess of one-tenth of salary); c. Rs. 120; d. Rs. 300.

Since Rs. 90 is the least amongst the four amounts worked out as per clauses of rule 2A, only this amount will be treated as exempt under rule 2A.

EXAMPLE 2 : Persons getting Rs. 600 p.m. and house rent allowance of Rs. 90 p.m., expenditure on house rent being Rs. 140 p.m.

As per clauses of rule 2A :

a. Rs. 80; b. Rs. 90 (expenditure on rent in excess of one-tenth of salary);

c. Rs. 120; d. Rs. 300.

Exemption available will be for Rs. 80 as this is the least amount.

EXAMPLE 3 : Persons getting a salary of Rs. 600 p.m. and house rent allowance of Rs. 90 p.m., expenditure on rent being Rs. 60 p.m. or less.

As per clauses of rule 2A:

a. Rs. 90; b. Rs. nil (expenditure on rent in excess of one-tenth of salary);

c. Rs. 120; d. Rs. 300.

No exemption is available in this case.

4. It is also clarified that the 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

clarification 3

1. Reference is invited to the Board’s letter No. 12/19/64-IT(B), dated 8-1-1965, addressed to all State Governments. A question has been raised whether the house rent allowance at flat rates sanctioned to Central Government servants without verification of rent receipts vide the Ministry of Finance (Department of Expenditure) O.M. No. 2(22) E-II/60, dated 2-8-1960, will be exempt from tax under section 10(13A) read with rule 2A of the Rules or it is necessary for the Disbursing Officers to verify in each case whether the employee has paid house rent and the allowance exempted is less than the difference between the actual expenditure on house rent and 10 per cent of the salary?

2. The Board have decided that in the case of Central Government employees who are in receipt of house rent allowance at flat rates and who are not residing in their own house or in the house of their parents, the allowance at the flat rates so received may be treated as exempt from income-tax under section 10(13A) without further verification. Necessary amendment to the rules is being made accordingly but pending this amendment there is no objection to Disbursing Officers ignoring such house rent allowance while calculating the tax to be deducted at source during the current financial year.

Letter : F. No. 12/19/64-IT(B), dated 22-2-1966.