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Chapter 5 HRA and LTA Calculations and Eligibility

One of the basic purposes of salary structuring is to ensure that an employee is able to legitimately reduce the liability of income tax to the maximum extent possible. The Income Tax Act offers numerous methods of salary structuring to this effect.

Two such means of saving tax on income are the House Rent Allowance (HRA) and the Leave Travel Allowance (LTA).

HRA is designed to give exemptions on the rent that assessees pay for their residential stay. It should be remembered that the HRA benefit is not available on rent paid for running any activity other than residence. Also, the rent must be paid in any mode other than cash such as cheque, DD, Pay Order, NEFT, RTGS, IMPS, etc., where there is an audit trail available with the bank. As per the latest rules, the HRA benefit is only available if the assessee can furnish stamped receipts for rent paid and the rental payment is supported by a registered rent deed. An online deed registration is good enough.

LTA, on the other hand, is an allowance for individuals to travel to and back from a single point via the lowest eligible fare. Only travel cost is permitted to be claimed as LTA and not other costs. The assessee is eligible to claim this for self, spouse, dependent children, and also for dependent parents.

Let us now look at these two components of income in greater detail.

LTA: Leave Travel Allowance

Leave Travel Allowance, or LTA, also popularly referred to as Leave Travel Concession (LTC), is a special type of allowance given to cover an employee’s travel expenses when he is on leave from work. The word to note here is ‘Allowance’. This means that it has two parts. To the extent you can produce requisite bills and proof of travel twice in a block of four years, it becomes a reimbursement and the balance becomes a taxable allowance. Let us understand this with an example.

Illustration 1

Chandresh received Rs.76,000 as LTA in FY18 . During the year, he travelled to Rameshwaram and back as part of a family holiday. His expenses on the trip were as follows:

Tickets: Rs.55,000
Hotel Stay: Rs.23,000
Food: Rs.8,000

In the case of Chandresh, only the ticket fare of Rs.55,000 will be eligible to be included as an exempt portion of LTA. The balance of Rs.21,000 will be added back to his income and taxed at his normal rate. Observe here that the hotel expenses and food expenses are not eligible for deduction under LTA.

LTA is exempt from tax u/s 10(5) of the Income Tax Act, 1961, subject to certain conditions. It qualifies as an allowance that is either fully or partially exempt depending on the conditions that are met.

Types of LTA

There are two types of LTA that employees can receive from their employer.

Firstly, there is any travel concession or assistance the employee receives (for himself or his family) from his employer to cover expenses incurred while travelling on leave. The exemption is only for travelling expenses and nothing else.

Secondly, if there is any travel concession or assistance the employee receives (for himself or his family) from his former employer to cover expenses incurred while travelling post retirement or termination of service.

In case of a mid-way resignation of termination of services, employers are obliged to provide proportionate LTA benefit to their former employees. This also falls under the definition of LTA/LTC.

We also need to understand the definition of ‘family’ quite clearly here. For the purpose of LTA eligibility calculation, family includes the individual (employee), his/her spouse, his/her children, his/her parents (principally or wholly dependent), and his/her siblings (principally or wholly dependent).

Key highlights of the LTA benefits for employees

LTA can be claimed twice in a period of four years. The blocks are defined clearly in the Income Tax Act as under:

Block 1 Block 2 Block 3 Block 4 Block 5
1986-1989 1990-1993 1994-1997 1998-2001 2002-2005
Block 6 Block 7 Block 8 Block 9 -
2006-2009 2010-2013 2014-2017 2018-2021 -
  • The above table captures the blocks of years with both the ends inclusive. We are current in the ninth block of LTA and we shall see later why this concept and the interpretation of these blocks is important to the individual.
  • Only travel expenses can be claimed under LTA for tax exemption eligibility. Therefore, other expenses like food, stay, hop travelling, entertainment, and shopping, etc., are not eligible for LTA exemption even if you are willing to produce proofs of monies spent. All LTA exemptions are only available against original proofs of travel. Therefore, remember to keep all the proofs and documents safe and secure with you. In case of air travel and train travel, e-tickets can be produced. However, in case of booking through travel agents, the original invoice should also be produced. Photocopies are not permitted.
  • An important pre-condition of LTA is that only the expenses actually borne by the employee on travelling are eligible for tax reimbursements/concessions. Apart from submitting the originals to the employer, the employee also has to keep a photocopy of all the proofs handy in case of query from the Income Tax department. Exemption is allowed for only two travels within a block of four years.
  • Producing legitimate proofs of travel is not a guarantee that you are eligible for LTA exemption. For example, if you are eligible for AC-II travel (eligibility Rs.18,000) and you travelled by air (costing Rs.26,000), then the employer will only refund Rs.18,000 and the balance of Rs.8,000 will be added back to your income and taxed at the normal rate. The amount of exemption is decided on the mode of transportation chosen and connectivity of the place.

Understanding the concept of LTA blocks in greater detail

We have already captured the nine four-year blocks for LTA exemption in the table above. The reason these blocks are important is that exemptions can be claimed twice during each block period. This is the basic concept on which LTA calculation is based and the eligibility is decided. The current or on-going block year is the ninth one, and the four years that make it up are 2018, 2019, 2020, and 2021.

But what if you used only one LTA exemption in the previous (8th) block (2014-2017)? Are you eligible to carry forward the LTA to the next block? This is where the concept of carry over concession (COC) comes into play. Let us see how COC works in practice.

If the assessee did not use LTA provided by his employer either once or twice (the permitted limit) in a four-year block period, then he can still claim LTA exemption by using LTA in the year immediately succeeding the block period. This is known as carry over concession. So, if you used the LTA exemption only once in the previous block of 2014-2017, then the one concession you did not use can be carried forward and used in the year 2018 (year immediately succeeding the previous block and also the first year of the next block), but not after it. Let us understand this with an illustration.

Illustration 2

Suppose Raghav claimed only one exemption during the eighth block ( 2014-18). He still has one exemption remaining. So when can he claim it? He can claim this concession in the next year, i.e. 2018 (first year of the ninth block only). Thus, in the ninth block period (2018-21), Raghav can effectively claim three exemptions in total, but he needs to claim the carry over concession of the previous block in 2018 only and not later than that.

What expenses are eligible for LTA concession?

  • In case of travel by air, the economy air fare of a national carrier by the shortest route or the actual amount spent on travel, whichever is less, is exempt from tax.
  • In case of travel by rail, the AC-I rail fare by shortest route or actual amount spent on travel, whichever is less, is exempt from tax.
  • If the origin and destination are connected by rail but the journey is performed by a mode of transport other than air or rail, then the AC-I rail fare by shortest route or actual amount spent on travel, whichever is less, is exempt from tax.
  • If the origin & destination points are not connected by rail or air (partly/fully) but are connected by other recognized public transport systems, then the first class or deluxe class fare of such transport by shortest route or actual amount spent on travel, whichever is less, is exempt from tax.
  • If the place of origin & destination are not connected by rail or air (partly/fully) and also not connected by other recognized public transport system, then AC-I rail fare by shortest route (assuming that the journey was performed by rail) or the amount actually spent on travel, whichever is less, is exempt from tax.

What is not eligible for LTA concession (negative list)?

  • Any international travel, i.e. outside the shores and borders of India, is not eligible for LTA concessions. LTA only covers domestic travel, i.e. travel within India.
  • Any mode of transport other than air, railway, or public transport is not eligible for LTA. For example, private cruises are not eligible for LTA exemption.
  • Any expenses other than for direct travel are not eligible for LTA concession. Also, any detours are not eligible; only point-to-point expenses are covered.
  • Tax exemption on LTA cannot be claimed for more than two children of an individual. This restriction is not applicable if the children were born before October 1, 1998.
  • Children born out of multiple births (twins/triplets, etc.) after the first child will be treated as one child only. So the above mentioned restriction will not be applicable in this case.

Illustration 3

Nayan, an employee of Satara Iron & Steel Ltd., travelled from Pune to Hyderabad and back via a business class flight. His total spend on the air tickets was Rs.35,000. The economy class return air fare (which Nayan is eligible) is, however, Rs.18,000. Hence, in this case, Nayan is only eligible to claim an LTA benefit to the extent of Rs.18,000. Even though he has legitimately spent Rs.35,000, the balance Rs.17,000 will be taxable at normal rates and won’t be available for LTA exemption. Irrespective of what you actually spend, the LTA eligibility is only to the extent of actual expenditure or eligibility, whichever is less.

HRA: HOUSE RENT ALLOWANCE

When moving to a different city to work, one of the first things a person looks for is suitable accommodation. Normally, rental costs eat up a large chunk of our monthly outflows and hence, the IT Act has provided for special concessions to reduce the tax burden on income. For claiming the benefit of HRA, the HRA allowance must be a specific part of your appointment letter and also has to be part of your monthly pay slip. Only then can you claim the benefits of HRA.

How is HRA calculated for Indian employees?

For tax purposes, the least of the following three is deductible from your total income and only the balance is taxable as your salary income. This HRA exemption helps you to substantially reduce your taxable income and your tax liability by extension.

These three items are:

a. Actual HRA received
b. 50% of ‘Basic salary + DA’ for those living in metro cities (40% for non-metros)
c. Actual rent paid less 10% of basic salary + DA. If there is no DA, then only basic salary will be considered for this purpose.

Let us understand the calculation of HRA with an actual example.

Illustration 4

Rajesh Shah is employed as an engineer with KSB Pumps Ltd. in Delhi (remember, Delhi being a metro city, Item b above will be taken as 50%).

Rajesh paid a monthly rent of Rs.30,000 during FY2017-18 i.e. Assessment Year(AY) 2018-19. KSB Pumps Ltd. pays him basic monthly salary of Rs.50,000 along with dearness allowance (DA) of Rs.4,000. He also receives HRA of Rs.2,00,000 (annually) from his employer during the year.

Let us understand how the HRA component would be exempt from income tax during FY2017-18 for Rajesh’s tax calculations.

No Particulars Amount (Rs) Amount (Rs)
1 Actual HRA received -- 2,00,000
2 Rent paid (30,000 pm*12 months)
  - 10% of {(50,000pm*12 months) + (4,000 pm*12 months)} i.e. 10% of Basic + DA
3,60,000 2,95,200
64,800
3 50% of {(50,000 pm*12) + (4,000 pm*12)}
(50% is considered as the accommodation in Delhi)
3,24,000
4 Exempt HRA = lowest of 1, 2, & 3 2,00,000

In the above case, the lowest of the three items (Rs.2 lakh) is the actual HRA received. Hence, the entire HRA will be exempt for Rajesh Shah and will be deducted from his taxable income. This is the benefit of HRA component in the taxable income for individuals.

What if you own an apartment, also pay rent, and are getting HRA?

There is a normal misconception among many assessees that if you have an apartment of your own and are claiming benefits under Section 24 of the Income Tax Act, then you are not eligible to claim HRA benefits. That is not correct. Despite having your own apartment and claiming the benefits of Section 24, you can claim the HRA benefit as it has no bearing towards your home loan interest deduction and both can be claimed.

The only thing you require to claim HRA is an HRA component inclusion in your appointment letter and salary slip, a registered lease agreement with the landlord, and stamped monthly rent receipts signed by the landlord or his or her authorized signatory / power of attorney.

Requirement of landlord’s PAN

If you have taken a house on rent and are making a payment in excess of Rs.1,00,000 annually, remember to obtain the landlord’s PAN or you may lose out on the HRA exemption. This is a statutory requirement. Landlords without a PAN must be willing to give you a declaration to that effect. There is also an aspect of TDS deduction in the case of payment of rent. Any rent payment in excess of Rs.50,000 per month entails a TDS of 10% to be deducted.

As a tenant you need to deposit the TDS with the government and you an issue the TDS certificate to your landlord accordingly. Tenants paying rent to NRI landlords must remember to deduct TDS of 30% before making the payment towards rent.

You can get exemption on rent even if you don’t get HRA

This is an interest benefit to know of. If you are making payments towards rent for any furnished or unfurnished residential accommodation occupied by you but do not receive HRA from your employer, you can still claim a deduction under Section 80GG.

In this case too, the least of the following three items will be exempt:

a. Rs.5,000 pm
b. 25% of adjusted total income (excluding capital gains)
c. Actual rent less 10% of adjusted total Income*

You will be required to file Form 10BA with details of payment of rent.

*Conditions that must be fulfilled to claim this deduction:

a. You are self-employed or salaried

b. You have not received HRA at any time during the year for which you are claiming 80GG

c. You or your spouse or your minor child or HUF, of which you are a member, do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment, or carry on business or profession.

In the case where you own residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. That other property would be deemed to be let out in order to claim the deduction under Section 80GG.

It is advised to use this section very judiciously and only if you meet all the criteria above, not otherwise.

Did you know that you can claim HRA even if you live with your parents?

If your company provides you with house rent allowance (HRA) and you live with your parents, then you are still eligible to claim HRA benefits. You can pay the rent to your parents and claim the allowance provided. You just need to enter into a formal rental agreement with your parents and ensure that the money is transferred by banking channels. Cash transfers are not permitted.

Remember, HRA and LTA are very useful tools for reducing your tax liability.

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