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.
HRA or House Rent Allowance is a salary component paid by 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 is applicable 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 stays at a rented apartment for a rent of Rs.20,000 per month and is eligible for a HRA equal to 50% of the basic salary which amounts to 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 = Rs.20,000 – Rs.4,000 = Rs.16,000
Hence, net taxable HRA for Amit = Rs.25,000 – Rs.16,000 = Rs.9,000
Here the value of net taxable HRA is Rs.9000 because of the following reason.
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?
In order 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 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 tax benefits on your home loan as well as HRA tax benefits in case your own home is rented out and you yourself are staying at a rented place. However, in such a case you need to disclose your rental income or income from 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 is able to 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)
Interim Finance Minister Piyush Goyal presented the Union Budget 2019-20 in the Lok Sabha on 1 February 2019. While tax cut for the middle-class people, affordable housing, and modernisation of the defence sector were among the key highlights of the budget this year, tax exemptions on house rent allowance were not a part of the agenda list. Despite of the high expectations of the public and home market, the Union Budget didn’t include any tax exemptions on House Rent Allowance. This means the salaried section of the country will have to wait for one more year for their expectations to be fulfilled.
However, the Finance Minister has proposed a tax exemption on notional rent for second occupied homes. This is a sign of relief for the homeowners as they will no longer have to pay tax on notional rent for their second occupied house irrespective of whether they have put the property on rent or haven’t. Previously, house owners were charged tax on the notional rental income in event of having more than one self-occupied house according to the current Income Tax law. Besides benefitting the house owners, this exemption will also give a boost to the real estate industry which is coping with low demand as people will now show more interest in buying new homes.
Salaries of employees from both public as well as private sector are divided into various sub-component allowances. For example, leave travel allowance, house rent allowance etc. These allowances form a part of the salary package of the employee as per agreement with the employer.
FAQs on House Rent Allowance
Will my HRA vary if I shift from a normal city to a metropolitan city?
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.
What are the documents required to claim HRA Exemption?
You are required to submit the following documents to claim HRA exemption.
- PAN Card details of landlord in case rent paid is greater than Rs.1 lac per annum
- Rent receipt
- Photocopy of rent agreement if required
Can I claim HRA Exemption and Home Loan Tax Exemption both?
Yes. You can claim both tax exemptions if you are able to furnish sufficient proofs for the same.
Can I pay rent to my father to avail HRA benefit?
Yes. You can pay rent to your father in order to avail tax exemption of HRA.
What happens if the city of residence and that of work is different?
In such a case, place of residence will be considered for HRA calculation and not place of work.
What if the employer refuses to allow the HRA Tax Benefit?
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.
Can both working spouses claim HRA Tax benefit separately?
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.