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.
What is HRA?
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 the 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.
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.
News About HRA
Inflation demands more House Rent Allowance (HRA)
The Income Tax Department went forward with its raids on Pothys Private Limited. Tax officials inspected establishment over nine different locations.
These raids were decided upon after the police were tipped off by an anonymous source. Also, the police caught two individuals carrying over Rs. 1 crore and when asked the culprits declared that they were employees of Pothys Limited.
Officials conducting the raids said that it is still going on and that they will provide more details once any new information pops up.
25th October 2016
With Capital Shift Imminent Officials Struggle To Find Accommodation
Andhra Pradesh Chief Minister, Chandrababu Naidu, announced that the state secretariat will be moved from Hyderabad to the new capital city of Amaravati before the 27th of June. The move however, is leaving government employees and officials in a scramble to transfer their families between the two cities. A range of hostels and private residential apartment buildings have opened their doors to the influx of government officials, with special deals on offer to entice them to take up residence in Amaravati. The shift from one city to another has been proposed with the purpose of generating and increasing economic activity within Andhra Pradesh. Currently, with employees and officials residing in Hyderabad, the state of Telangana earns a sizeable chunk of all commercial taxes and excise duties. However, with the move to Amaravati looming, the Naidu government is looking to shift this accruement of income to Andhra. In order to make the move easier on employees, the government has enhanced their house rent allowance from 13 per cent to 30 per cent.
3rd June 2016
House rents soar as Government sanctions Special House Rent Allowance
The state government in Andhra Pradesh has taken the decision of sanctioning special House Rent Allowance (HRA) of 30% for state employees. This has prompted landlords in AP to raise their rents by up to 60 per cent. Houses that could previously be procured for a rent of Rs.8000 or Rs.10000 per month are now expecting anywhere around Rs.10,000-15,000 per month.
Also, the move has given the government employees priority over other tenants as more and more house owners are preferring tenants with a government job. Rents in the Vijayawada, Guntur area have increased by almost 30-60 per cent.
6th May 2016
HRA might allow for an increased Inflation
While the Reserve Bank of India dropping its base lending rate about three times since the last year, it seems the inflation rate in the country has been curbed. But the bank is not yet assured of the change that has come about.
The Seventh Pay Commission changed a lot of things and RBI opine that increased HRA, income effect operating through consumption and several other factors will be instrumental in making the inflation rate go up.
12th April 2016
Cigarettes and Cars to be Expensive, HRA has been raised to Rs.60,000
The Finance Minister of India presented the government’s 3rd budget in which he said that the CPI inflation has come down to 5.5%. He also proposed Krishi Kalyan cess of 0.5% on taxable services to improve agriculture.
Excise duty will be hiked by 10-15% and this will make the cigarette and tobacco products expensive. Small tax payers will pay less tax.
Infra cess to be charged on cars, vehicles and SUVs making it expensive. Rs.3,000 relief per year to those with income less than or equal to Rs.5 lakh.
The HRA has been increased to Rs.60,000 from Rs.24,000.
1st March 2016