(9) Under Section 10(13A) of the Income-tax Act, 1961,any special allowance
specifically granted to an assessee by his employer to meet expenditure
incurred on payment of rent (by whatever name called) in respect of
residential accommodation occupied by the assessee is exempt from
Income-tax to the extent as may be prescribed, having regard to the area
or place in which such accommodation is situated and other relevant
considerations. According to rule 2A of the Income-tax Rules, 1962, the
quantum of exemption allowable on account of grant of special
allowance to meet expenditure on payment of rent shall be:
(a) The actual amount of such allowance received by the assessee in
respect of the relevant period; or
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(b) The actual expenditure incurred in payment of rent in excess of
1/10 of the salary due for the relevant period; or
(c) Where such accommodation is situated in Bombay, Calcutta,
Delhi or Madras, 50% of the salary due to the employee for the
relevant period; or
(d) Where such accommodation is situated in any other places,
40% of the salary due to the employee for the relevant period,
whichever is the least.
For this purpose, "Salary" includes dearness allowance, if the terms of
employment so provide, but excludes all other allowances and perquisites.
It has to be noted that 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
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.3000/- 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.
Further if annual rent paid by the employee exceeds Rs 1,80,000 per annum, it
is mandatory for the employee to report PAN of the landlord to the employer. In
case the landlord does not have a PAN, a declaration to this effect from the
landlord along with the name and address of the landlord should be filed by
(10) Clause (14) of section 10 provides for exemption of the following allowances :-
(i) Any special allowance or benefit granted to an employee to
meet the expenses incurred in the performance of his
duties as prescribed under Rule 2BB subject to the extent to
which such expenses are actually incurred for that purpose.
(ii) Any allowance granted to an employee either to meet his
personal expenses at the place of his posting or at the place he
ordinarily resides or to compensate him for the increased
cost of living, which may be prescribed and to the extent as
may be prescribed.
However, the allowance referred to in (ii) above should not be in the nature of a
personal allowance granted to the assessee to remunerate or compensate him
for performing duties of a special nature relating to his office or employment
unless such allowance is related to his place of posting or residence.
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The CBDT has prescribed guidelines for the purpose of clauses (i) and (ii) of
Section 10(14) vide notification No.SO617(E) dated 7th July, 1995
(F.No.142/9/95-TPL)which has been amended vide notification SO No.403(E)
dt 24.4.2000 (F.No.142/34/99-TPL). The transport allowance granted to an
employee to meet his expenditure for the purpose of commuting between the
place of his residence and the place of duty is exempt to the extent of Rs.800
per month vide notification S.O.No. 395(E) dated 13.5.98.