PROPERTY NEWS

The Bombay High Court has granted an interim stay on collection of Service Tax levied on buildings under construction, following a writ petition filed by the Maharashtra Chamber of Housing Industry (MCHI). Mr Sunil Mantri, President, MCHI, said the chamber had urged the High Court to restrain the respondents (Union Government and others) from taking steps against the members of the Chamber in respect of transactions for construction, development, and sale of immovable property under the various provisions of the Finance Act, 1994 and a new entry as amended by the Finance Act of 2010 in any manner, besides challenging the constitutional validity of the amendment.

According to Mr Mantri, the court had said, “No coercive steps shall be taken against the petitioner for the recovery of Service Tax in relation to the provisions in question, but it is clarified that assessment may proceed in accordance with law.”

This is an interim order and the hearing has been posted to August 3, 2010.

The text of the decision is reproduced below:

IN THE HIGH COURT OF BOMBAY

Writ Petition No. 1456 OF 2010

MAHARASHTRA CHAMBER OF HOUSING INDUSTRY

Vs

UNION OF INDIA

V C Daga And S J Kathawalla JJ.,

Dated: July 23, 2010

Appellant rep by: Mr.Rafique Dada, Senior Advocate i/b. Parimal Shroff & Co
Respondent rep by: Mr.R.V.Desai, Senior Advocate with Mr.R.B.Pardeshi

Service Tax – Construction Service – Constitutional Validity of Finance Act 2010 Amendment challenged – No coercive steps till next hearing: Notice issued to Attorney General of India

ORDER

P.C.

Heard.

Perused petition.

2. Arguable questions are raised in the petition with regard to the constitutional validity of Section 65(30a) read with Section 65(105)(zzp) and Section 65(105)(zzzh) read with Section 66 of the Finance Act,1994, as amended by the Finance Act, 2010 which needs consideration.

3. Rule.

4. Since the constitutional validity of the aforesaid provisions has been challenged, issue notice to the Attorney General of India along with respondent Nos.2 & 3, returnable on 3rd August,2010. In the meantime, until next date of hearing , no coercive steps shall be taken against the petitioners for the recovery of service tax in relation to the provisions in question, but it is clarified that assessments may proceed in accordance with law.

5. Mr.R.V. Desai, Learned Senior Counsel waives service on behalf of respondent Nos.4 to 6.

5. To be heard along with Writ Petition (L) No.1476 of 2010. Stand over to 3rd August, 2010.

House Rent Allowance (HRA) taxability and working/calculation of taxable HRA

Employees generally receive a house rent allowance (HRA) from their employers. This is a part of the salary package, in accordance with the terms and conditions of employment. HRA is given to meet the cost of a rented house taken by theemployee for his stay.The Income Tax Act allows fordeduction in respect of the HRA paid to employees. The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. It is to be noted that the entire HRA is not deductible. HRA is an allowance and is subject to income tax.

An employee can claim exemption on his HRA under the Income Tax Act if he stays in a rented house and is in receipt of HRA from his employer. In order to claim thededuction, an employee must actually pay rent for the house which he occupies.

The rented premises must not be owned by him. In case one stays in an own house, nothing is deductible and the entire amount of HRA received is subject to tax. As long as the rented house is not owned by the assessee, the exemption of HRA will be available up to the the minimum of the following three options:

1. Actual house rent allowance received from your employer
2. Actual house rent paid by you minus 10% of your basic salary
3. 50% of your basic salary if you live in a metro or 40% of your basic salary if you live in a non-metro

This minimum of above is  allowed as income tax exemption on house rent allowance.

Salary here means basic salary which  includes dearness allowance if the terms of employment provide for it, and commission based on a fixed percentage of turnover achieved by the employee. The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.

Meaning of Salary for calculation the exemption of HRA

• Salary means (Basic + D.A + Commission based on fixed percentage on turnover).
• Salary is to be taken on due basis in respect of the period during which the period accommodation is occupied by the employee in the previous year.

Examples for calculation of exemption/deduction of HRA

X has received following amount during the previous year.

1. Basic Salary – Rs. (5000*12) – Rs. 60,000/-
2. Dearness Allowance (D.A) – Rs. (1000*12) – Rs. 12000/-
3. House Rent Allowance (H.R.A.) – Rs. (2000*12) – Rs. 24000/-
4. Actual Rent Paid – Rs.(2000*12) – Rs. 24000/-

Calculation

The minimum of the following amount shall be exempt

• Actual HRA received (2000*12) – Rs. 24000/-
• Rent Paid in excess of 10% of salary ( 24000-7200) – Rs. 16800
• 40% of Salary – Rs. 28800/-

Therefore, Rs. 16800 shall be exempt and the balance Rs. 7200 shall be included in gross salary.

Frequently Asked Questions:-

How is HRA accounted for in the case of a salaried individual and a self-employed professional?

HRA (house rent allowance) is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. On the other hand, self-employed professionals cannot be considered for HRA exemption under this act, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.

What are the dependent factors in calculating HRA for the salaried individual?

When you are calculating HRA for tax exemption, you take into consideration four aspects which includes salary, HRA received, the actual rent paid and where you reside, i.e., if it is a metro or non-metro. If these aspects remain constant through the year, then tax exemption is calculated as a whole annually, if this is subject to change, as in a rent hike, pay hike or shift in residence etc., then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.

The place of residence is significant in HRA calculation as for a metro the tax exemption for HRA is 50% of the basic salary while for non-metros it is 40% of the basic salary. This holds true especially when you work at a metro and reside at a non-metro. In this case, your city of residence only will be considered for calculating your 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 other sources’ 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. Sham transactions can only spell trouble under scrutiny, so steer clear of these.

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

You need to submit proof of rent paid through rent receipts, for which only two need to be submitted, one for the beginning of the year and one towards the end of the financial year. 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.

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.