The House Rent Allowance (HRA) is an important component of the salary that is paid by employers for meeting the accommodation requirements of employees. Even self-employed individuals can claim tax benefits for this.
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What is HRA?
HRA or House Rent Allowance is a salary component paid by the employer to employees for meeting the accommodation expense of renting a place for residential purposes. HRA forms an integral component of a person's salary. HRA applies to both salaried as well as self-employed individuals.
HRA for salaried people is accounted for under section 10 (13A) of the Income Tax Act in accordance with rule 2A of Income Tax rules. Similarly, self-employed individuals are not considered for HRA exemption under this section but can claim tax benefits under section 80GG of Income Tax Act.
How to Calculate HRA Exemption?
In the section below, the process of HRA exemption is described in detail. But before this, let us take a look at the factors that affect HRA calculation and tax exemption on it.
Factors that affect HRA Calculation:
- HRA Received
- Actual rent paid
- City of residence (metro, non-metro or rural)
Let us take an example of Amit who stays in Delhi and earns a salary of Rs.40,000 per month.
|Amit apartment rent||Rs.20,000 per month|
|Amit is eligible for a HRA equal to 50% of the basic salary||50% of Rs.40,000 = Rs.20,000|
|Actual HRA he receives from his company is||Rs.25,000|
|Excess of rent paid over 10% of total salary||
Rs.20,000 - 10% of Rs.40,000
So, Rs.20,000 – Rs.4,000 = Rs.16,000
|Hence, net taxable HRA for Amit||Rs.25,000 – Rs.16,000 = Rs.9,000|
Salaried employees are eligible for HRA exemption for the income tax that they are required to pay each financial year. As per the Income Tax Act, for the calculation of house rent allowance, the least of the following three components is taken into consideration -
- Actual HRA received by the employer
- 50% or 40% of the basic salary depending upon a metro or a non-metro location, respectively
- Rent paid minus 10% of basic salary
Where, basic salary refers to basic + DA + commission on sale at fixed rate.
Some of the most prominent rules pertaining to house rent allowance are mentioned below.
- 40% of the basic salary is calculated as HRA for people living in non-metro cities while the same is 50% for employees in metro cities like Mumbai or Chennai.
- In order to avail HRA benefit it is not necessary that you pay rent only to a landlord. Individuals can pay rent to their parents and show relevant receipts to claim HRA exemption.
- However, you cannot claim HRA exemption by showing that you pay rent to your spouse. This is not permissible under the income tax law.
- Rent receipts need to be submitted as proof in order to avail tax exemption benefit.
- PAN card details of the landlord need to be furnished so that relevant tax deductions can be made from his/her income from property (rent received).
- PAN details of landlord are required only if the rent paid exceeds one lac rupees per annum.
- HRA received by an employee who is residing in his/her own house is not exempt from income tax.
How to make HRA Claim?
To make HRA or house rent allowance claim, individuals are required to submit their rent receipts along with PAN details of their landlord in case the rent paid in a financial year is more than Rs.1 Lac. A circular related to the same has mentioned that in case the landlord does not possess a PAN number then the Income Tax department has multiple technical platforms through which it verifies the information furnished by tax-payers. As such, any fabrication of information is not a good idea.
How to Claim Deduction Under Section 80GG?
In order to claim deduction under Section 80GG of the Income Tax, the lowest of the following will be taken into account:
- Rs.5,000 per month
- 25% of the adjusted total income
- Actual rent which is 10% less of the adjusted total income
Adjusted Total Income is the total income minus the long-term capital gains, and short-term capital gains under section 111A, section 115A or 115D and deductions from sections 80C to 80U.
Jason is earning an income of Rs.3 lakh annually. He pays a rent of Rs.5,000 per month which is Rs.60,000 annually. In such case the deduction will be as follows:
|Condition 1||Monthly rental limit of Rs.5,000 per month which is Rs.60,000 annually.|
|Rent paid which is Rs.60,000 minus 10% of the total adjusted income which is 30,000 which amounts to Rs.30,000|
|25% of the total annual income which is Rs.75,000|
In this case, the second condition is satisfied, hence an HRA of Rs.30,000 can be claimed.
Anwar is earning an income of Rs.8 lakh annually. He pays a rent of Rs.10,000 per month which is Rs.1.2 lakh annually. In such case the deduction will be as follows:
|Condition 1||Monthly rental limit of Rs10,000 per month which is Rs.120,000 annually.|
|Rent paid which is Rs.120,000 minus 10% of the total adjusted income which is 80,000 which amounts to Rs.40,000|
|25% of the total annual income which is Rs.2 lakh|
In this case, the condition number 2 is satisfied, hence an HRA of Rs.40,000 can be claimed.
How to claim HRA when living with Parents
If you are staying with your parents and wish to claim HRA, then one of the ways to do this is to enter into a rental agreement with your parents where you pay them a certain sum of money as rent every month. The amount can be claimed as HRA and exempted from tax by you during income tax filing. However, your parents will have to show the rent paid by you on their income tax returns.
How to Avail Tax Benefits on your Home Loan as well as HRA?
Tax benefits on HRA are applicable as long as you are paying rent for your accommodation. However, you can avail of tax benefits on your home loan as well as HRA tax benefits in case your own home is rented out and you are staying at a rented place. However, in such a case you need to disclose your rental income or income from the property from which suitable tax will be deducted by the government.
If the owned and the rented property are in the same city then tax exemption on both cannot be claimed. However, if any individual can prove that the owned property is quite far from the place of work and hence the rented accommodation has been availed, then tax exemption on both HRA as well as housing loan can be claimed.
Union Budget Highlights in House Rent Allowance (HRA)
The 2020 Union Budget has two income tax regimes available for taxpayers. If the new tax regime is chosen, House Rent Allowance (HRA) cannot be claimed. However, if the old income tax regime is chosen, then the HRA can be claimed as before.
FAQs on House Rent Allowance
- Will my HRA vary if I shift from a normal city to a metropolitan city?
- What are the documents required to claim HRA Exemption?
- Can I claim HRA Exemption and Home Loan Tax Exemption both?
- Can I pay rent to my father to avail HRA benefit?
- What happens if the city of residence and that of work is different?
- What if the employer refuses to allow the HRA Tax Benefit?
- Can both working spouses claim HRA Tax benefit separately?
Yes. HRA is dependent upon the city in which you stay. Moving from a non-metro city to metro would change your HRA from 40% to 50% of your basic salary.
You are required to submit PAN Card, Rent receipt and Photocopy of rent agreement if required.
Yes. You can claim both tax exemptions if you are able to furnish sufficient proofs for the same.
Yes. You can pay rent to your father in order to avail tax exemption of HRA.
In such a case, place of residence will be considered for HRA calculation and not place of work.
You need not worry in case your employer refuses to allow tax benefit. You can claim the same while filing your tax return and can receive the exempted amount as refund of excess TDS.
Yes. If both of them are paying rent to the landlord and both can furnish separate receipts. However, there should not be duplication which might lead the income tax department to deduct twice the tax from landlord's income from property.