HRA - House Rent Allowance

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.

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.

All about HRA
House Rent Allowance

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:

  • Salary
  • HRA Received
  • Actual rent paid
  • City of residence (metro, non-metro or rural)

HRA Calculation:

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

HRA Exemption/Deduction

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.

HRA Rules

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:

  1. Rs.5,000 per month
  2. 25% of the adjusted total income
  3. 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.

Example 1

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.

Example 2

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

  1. Will my HRA vary if I shift from a normal city to a metropolitan city?
  2. 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.

  3. What are the documents required to claim HRA Exemption?
  4. You are required to submit PAN Card, Rent receipt and Photocopy of rent agreement if required.

  5. Can I claim HRA Exemption and Home Loan Tax Exemption both?
  6. Yes. You can claim both tax exemptions if you are able to furnish sufficient proofs for the same.

  7. Can I pay rent to my father to avail HRA benefit?
  8. Yes. You can pay rent to your father in order to avail tax exemption of HRA.

  9. What happens if the city of residence and that of work is different?
  10. In such a case, place of residence will be considered for HRA calculation and not place of work.

  11. What if the employer refuses to allow the HRA Tax Benefit?
  12. 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.

  13. Can both working spouses claim HRA Tax benefit separately?
  14. 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

  • HRA hike for Central Government employees

    The Central Government is considering the House Rental Allowance (HRA) hike demand by the National Federation of Indian Railway men (NFIR) and Indian Railways Technical Supervisor Association (IRTSA). The proposal for the increased HRA allowance has been shared with Railway Board and on approval, more than 11.56 lakh employees will benefit from the revised HRA, January 2022 onwards.

    23 November 2021

  • Government revises pay structure for HRA

    The Jammu and Kashmir Government has announced that House Rent Allowance (HRA) to the Government employees of Union Territory of Jammu and Kashmir will be payable according to the new pay structure. The revised rates for All Metropolitan Cities (X Class Cities) will be 27% of the basic pay. For Srinagar U. A. /Jammu U.A (Y Class Cities), the rate is 18% of the basic pay. For all other places (Z Class locations) the rate is 9% of the basic pay.

    11 November 2021

  • HRA for government employees set to go up by 3%

    The BPJ government had earlier increased the Dearness Relief (DR) and Dearness Allowance (DA) for Central government employees, effective from 1 July 2021. Subsequently, the Centre also increased the HRA by 3% of central government officials, w.e.f.August 2021.

    The Centre also added that the increment would be based on the basic salary of the employee. According to the 7th pay commission, when the DA of central government employees crosses the 25% mark of basic salary, they would be entitled to a 3% increased HRA. The revised HRA will be paid to employees with this month's salary.

    7 October 2021

  • HRA revised for central government employees

    Central Government who announced a hike in the dearness allowance (DA) has now decided to revise the house rent allowance (HRA) for the employees of Central government. The decision will come into effect from August where the employees of the Central government will receive an increased HRA as per the revised rates.
    An order had been issued by the Department of Expenditure on 7 July 2017 announcing that the HRA will be revised if the dearness allowance crosses 25%. The DA has been hiked t0 28% since 1 July, which has seen the HRA also being revised.
    Post revision, the house rent allowance has been hiked by 1-3% for different categories. For 'X' class cities, the HRA applicable will be 27% of the basic pay. Similarly, for ‘Y’ class cities, the HRA will be 18%, and 9% of the basic pay for 'Z' class cities. Currently, the HRA is 24% , 16%, and 8% for all three classes.

    19 July 2021

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