Before that, let’s first understand how HRA is calculated and what tax experts have to say about HRA tax exemption on security deposits.
2 min read . 19 Jan 2021
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Calculation of HRA tax exemption
The HRA tax exemption provided by the employer to the employee can be claimed if the employee incurs expenses towards renting a house for his stay. The tax exemption is available to the least of the following scenarios as mentioned:
- Actual HRA received
- Rent paid in excess of 10% of salary
- 50% of salary (where property rented is in metro cities) or 40% of basic salary (if the property rented is in non-metro cities)
The excess of the HRA over the exemption would be the taxable portion of HRA.
No exemption is available in a case where the residential accommodation occupied by the taxpayer is owned by him/her, or the taxpayer has not incurred expenditure on payment of rent in respect of the residential accommodation occupied by him/her.
Can you claim for security deposits under HRA tax exemption?
Section 10(13A) of Income Tax Act provides for exemption from the House Rent Allowance (HRA) reads as under:
“…..allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee…"
Sudhakar Sethuraman, Partner, Deloitte India said that the expression “payment of rent (by whatever name called)" is very broad and one may argue that security deposit can also be accommodated in such expression, attention should be drawn to the ordinary meaning of Rent. “The ordinary meaning of Rent under Oxford Dictionary is, “to regularly pay money to somebody so that you can use something that they own, such as a house, a room, some land, etc," Sethuraman explained.
For instance, a tenant paid rent of ₹25,000 for the first month and security money of ₹25,000, as mentioned in the rent agreement, to the landlord. What will be the taxability of that additional security money of ₹25,000 paid to the landlord for that financial year?
Sethuraman said that security deposit is not a regular payment but one-time payment to the landlord which stands refundable at the time of vacating the premises. Hence the tenant may not be able to claim HRA exemption for payment of security deposit. Further," Sethuraman said, "The ₹25,000 paid towards the rent can be claimed towards HRA whereas the amount of ₹25,000 paid towards security deposit shall not qualify as HRA deduction for that financial year. However, where the tenant vacates the house property during the financial year and by virtue of that, the landlord either adjusts the security deposit towards outstanding rent the tenant can then look at claiming deduction as the security deposit is in lieu of rent."
Adding to it, Archit Gupta, Founder and CEO ClearTax said, "There will be no taxability or any tax treatment in the Income Tax Return (ITR) for an individual (tenant) for the security deposit paid to the landlord. If that individual is running a business and has paid a security deposit for the premises which are being used for business purposes - such a security deposit will appear in the balance sheet as an asset."
