Planning to work from home (WFH) permanently? You might want to stall your plans for some time. That is, at least until, the Ministry of Labour and Employment comes to a crucial decision regarding HRA deduction for WFH employees.
Possible changes in existing salary structure
The Covid-19 pandemic led to a worldwide shift in how people live and work. Most companies were compelled to shift to a work from home (WFH) system to cut the risk of transmission. With the emergence of more mutations and variants, many employees prefer to have the option of permanent WFH status. The good news is that more and more companies globally are opening up to the idea of a permanent WFH employee. The bad news is that in India, at least, that could lead to a change in the existing salary structure. The Labour Ministry is mulling over a decision whether to cut the House Rent Allowance (HRA) for work from home employees.
What is the justification for changes to the salary structure?
Employees who work from home are required to bear certain unavoidable expenses such as WiFi and electricity costs. Such infrastructure expenses are being borne by WFH employees. Many people had shifted to their hometowns, which were often Tier 1, 2, and 3 cities during the pandemic to save on expenses and be with family. From the perspective of the employers, this relocation should be reflected in the employees’ compensation package as these cities have a lower cost of living than India’s metros. In particular, many employers think there should be an HRA deduction to reflect this change in location and living expenses.
What is HRA?
HRA is an allowance paid by employers to employees who lived in rented residential accommodations. HRA is a basic and important aspect of the salary structure. Salaried individuals can claim tax exemption on the HRA received from their employers. Click here to learn more about HRA deduction.
What are the prevailing conditions for claiming HRA?
The prevailing conditions for claiming HRA are as follows:
- Under Section 10(13A) of the Income Tax Act, a salaried person can claim income tax benefits against their HRA received from their employer on the realisation of some terms and conditions.
- The HRA should be claimed for a residential accommodation occupied by the employee. The rent must be paid by the employee.
- HRA can be claimed on any rented residential accommodation as long as it is not wholly or partially owned by the employee.
What is the amount of HRA that can be claimed?
The tax exemption against HRA will be the least of the following:
- Actual HRA received from an employer
- 50% of basic salary + Dearness Allowance if you live in a metro city. Or 40% of basic salary + Dearness Allowance if you live in a non-metro city
- Actual rent that is paid minus 10% of basic salary + Dearness Allowance
Can you claim HRA if you have a home loan?
You can claim tax exemption on your home loan as well your HRA on the following conditions:
- If the house you bought and the rented accommodation are at different locations. For example, you work in Mumbai and live in rented accommodation there but own a house in Surat
- If the house/property is under construction you cannot move in
- If you are unable to reside in your own house for various reasons such as it is too far from your workplace. The distance between your house and workplace should be 35 km or more
- If you rent out your property and reside in another rented accommodation
Can you claim HRA when living with your parents?
You can claim HRA if you live with your parents on a property owned by them. You would have to enter into a rent agreement with your parents and pay the rent to them every month. Your parents would have to provide rent receipts to you which you can then submit as proof of rent and claim HRA exemption.
What is the problem with HRA deduction?
Since salaried employees receive tax exemption, An HRA deduction by the employer will have a direct impact on the income tax payment of the salaried individuals, their tax liabilities will see an increase. As a way around this, many experts believe that the Labour Ministry should introduce a component with a tax rebate that will replace the deducted HRA component.
The bottom line
If there is an HRA deduction for permanent WFH employees, it will bring about a major change in the existing salary structure, which, in turn, will affect the tax liabilities of Indians all over the country. This potential change will give all employees hoping to work from home permanently, a reason to pause before making a final decision. They will at least wait until the Labour Ministry announces any change in the salary structure.
