HRA (House Rent Allowance) is a common component of salary structures in India. It is provided to employees on the basis of cost of living in a particular city or region in which the company is based.
Although it is a part of the salary, HRA, unlike basic salary, is not fully taxable. Subject to certain conditions, a part of HRA gets exempted under Section 10 (13A) of the Income Tax Act, 1961.
The amount of HRA exemption is deductible from the total income before arriving at a taxable income. This helps the employee save tax.
Who can avail of HRA Exemption?
The tax benefit is available only to a salaried individual who has the HRA component as part of his salary structure and is staying in a rented accommodation. Self-employed professionals cannot avail the deduction.
How much HRA is exempted?
The exemption for HRA benefit is the minimum of:
i) Actual HRA received
ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and
iii) Excess of rent paid annually over 10% of annual salary
For calculation purpose, the salary considered is ‘basic salary’. In case ‘Dearness Allowance (DA)’ (if it forms a part of retirement benefits) and ‘commission received on the basis of sales turnover’ is applicable, they too are added to compute the minimum HRA exemption available.
The tax benefit is available to the person only for the period in which the rented house is occupied.
How is HRA calculated?
Let’s say an individual, with a monthly basic salary of Rs.15,000, receives HRA of Rs.7,000 and pays Rs.8,400 rent for an accommodation in a metro city. The tax rate applicable to the individual is 20 percent of his income.
To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:
i) Actual HRA received = Rs.84,000
ii) 50% of salary (metro city) = Rs.90,000 (50% of Rs.1,80,000)
iii) Excess of rent paid annually over 10% of annual salary = Rs.82,800 (Rs.1,00,800 – (10% of Rs.1,80,000))
It shows that of Rs.84000 actually received as HRA. Rs.82800 gets tax exemption and only the balance of Rs.1200 gets added to the employee’s income, on which a tax of Rs.240 ( 20 per cent slab ) gets payable.
What are the documents that are necessary for availing HRA exemptions?
HRA exemptions can be availed only on submission of rent receipts or the rent agreement with the house owner.
It is mandatory for the employee to report the Pan Card of the ‘landlord’ to the employer if the rent paid is more than Rs.1,00,000 annually, or if it exceeds Rs.15,000 per month.
Common FAQs regarding HRA
1. Can I claim HRA exemption if I am paying rent to my family members?
For claiming HRA exemption on rent, the rented premises must not be owned by the person claiming the tax exemption. Thus, if you live with your parents and pay rent to them then you can claim that for tax deductions as HRA.
Even if you are renting the house from your parents, you must have documentary proof of financial transactions regarding tenancy. Thus a record of banking transactions and rent receipts must be available because your claim can get rejected by the tax department if they are not convinced of the authenticity of the transactions.
2. I own a house in City A but I am now living in a rented accommodation in city B. How can i avail of exemption?
One can avail the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home is rented out or you work in another city.
3. I do not have the HRA component in my salary but I pay rent. Can I claim for HRA exemption?
There may be some individuals who might not have HRA component in their salary structure. A non-salaried individual might also be paying rent. For them, Section 80 (GG) of the Income-tax Act offers help.
An individual paying rent for a furnished/unfurnished accommodation can claim the deduction for the rent paid under Section 80 (GG) of the I-T Act, provided he is not paid HRA as a part of his salary by furnishing Form 10B.
How much exemption can be availed of?
The least of the following is available for exemption from tax under Section 80GG:
(i) Rent paid in excess of 10% of total income
(ii) 25% of the total of the total income*
(iii) Rs.5,000 per month
While claiming a tax deduction, one must remember that the individual himself or his/her spouse, or minor child, or as a member of the Hindu Undivided Family (HUF) must not own any accommodation. Also, if the individual owns any residential property at any place and earns rent from it then no deduction is allowed.
One can avail the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home is rented out or you work in another city. However, the same is not available in case of Section 80GG.