How work from home may increase tax liability for certain employees

Rishab Chowdhary, 24, working with a research firm in Noida moved to his home town, Rishikesh, in July to stay with his parents as his company gave mandatory work from home in March post the lockdown. Chowdhary will be saving on the rent that accounted for 15% of his salary. However, he will not be able to claim the house rent allowance (HRA) exemption against for the number of months he will be staying with his parents, which will increase his tax liability for the year.

Post covid-19, many companies have allowed their employees to work from home. Some of them have moved to their hometowns thus saving on rent. Some have actually negotiated lower rent with their landlords. Let’s understand how HRA is calculated and how tax liability will go up if you are not able to claim it.

HRA calculation

Under Section 10 (13A) of the Income-tax Act, if an employee pays rent and HRA is part of salary, he or she can claim the rent paid as an exemption. The quantum will depend on the actual rent paid or HRA paid and the city where you are living in, whether it is a metro or non-metro.

One can claim the minimum of three as HRA exemption:

1. Actual HRA Received

2. 50% or 40% of salary in case of metro or non-metro cities

3. Excess of rent paid over 10% of basic salary.

“Since the actual rent paid would be nil, the HRA received for the months when rent is not paid will be taxable in the hands of the taxpayer,” said Shilpa Bhatia, director, direct taxes, AKM Global, a consulting firm.

Let’s assume a person receives ₹15,000 as monthly HRA and pays the same as rent. Now, if he doesn’t pay rent for nine months, during the FY2020-21, his taxable income will go up by ₹1,35,000. If the employee falls in the 20% tax bracket, the total tax liability will go up by ₹27,000.

But if you are paying rent to your family member to share the burden, you can claim that as a tax deduction. The relative receiving the amount will have to declare it as income and pay tax on it depending on the tax bracket he or she falls in.

“Incase people have shifted and are working from owned homes, then there is no payment of rent to a landlord, and hence, there is no deduction available. Consequentially, the tax liability of such a person goes up. However, at times such homes are owned by relatives and rent at a fair value is paid to them for use of the house and resources. If such is the case, then deduction for HRA should continue to be received on the basis of such fair rent paid, even to relatives,” said Vivek Jalan, partner, Tax Connect Advisory Services LLP.

So, do keep in mind the increased tax liability as you may have to pay higher taxes during the last quarter of the financial year if you have not updated the HR about the same already at the beginning of the financial year in April. Generally, companies ask for proofs such as rent receipts in the month of January. In case it is not submitted at that time, the HR deducts the tax from employee's salary.