House Rent Allowance, commonly referred to as HRA, forms an important component in the salary breakup of an employee. It is a type of compensation offered by a company according to its policies. This allowance is meant for employees, which is over and above their basic salary when they move to another city for work and need to pay house rent. Furthermore, as per provisions in the Income Tax Act, HRA is eligible for tax exemptions on the income earned that helps you in saving taxes. Let us understand in detail what HRA exactly is and how it helps in tax deductions.
What Is HRA (House Rent Allowance)?
As mentioned above, employers provide HRA as an allowance to address their employees’ rented accommodation needs. Both salaried and self-employed persons are eligible for an HRA, however, if you live in your own residence, you cannot avail tax deductions under the HRA exemption section.
Salaried individuals who live in rented premises can claim House Rent Allowance under Section 10 (13 A). They need to submit rent receipts to their employers to avail the benefit. The latter, in turn, will calculate the exempt HRA and deduct the same from the employee’s taxable salary. One can understand the exempted HRA from Form 16. It must be noted that HRA deductions are only available to those who opt for the old income tax regime and not for the new tax regime.
How is House Rent Allowance Determined?
House Rent Allowance depends on the city where the employee stays. For instance, individuals who live in metropolitan cities are entitled to HRA that will be equivalent to 50% of their basic salary. This percentage comes down to 40% of one’s basic salary when one resides in any other city. Furthermore, if you do not get any Dearness Allowance or commissions, your HRA should ideally be equal to 40% to 50% of your basic pay.
How to Calculate HRA with an Example
There are 3 ways to calculate your HRA benefit. The exemption of HRA benefit is the least of the below 3 calculations.
1.The exact HRA received
2.The actual rent paid minus 10% of your basic salary
3.50% of your basic pay (for a metro city) or 40% of your basic salary (for a non-metro city)
The minimum amount from the above three is computed as the HRA tax exemption that one may claim.
Let us understand it with an example. Aradhana works for an IT firm in Pune. She stays in a rented flat paying Rs. 7000 per month. Her monthly salary is Rs. 45,000 with Rs. 8,500 as HRA and Rs. 25,000 as basic pay. Now let us understand her HRA exemption according to the above 3 calculations:
1. By using the actual HRA from the employer:
Annual HRA from her employer = 8500 x 12
= Rs. 1,02,000
2. By calculating the actual rent paid minus 10% of your basic salary
The rent paid in a single year = 7000 x 12 = Rs. 84,000
By using the HRA percentage formula = (Actual rent – 10% of basic pay)
= {(7,000 x 12) – [(10% of 25,000) x 12]}
= 84,000 - 30,000
= Rs. 54,000
3. 40% of your basic salary (for a non-metro city)
Since Pune is a non-metro city, 40 % of the basic pay will be considered.
So, 40% of (25,000 x 12)
= 40/100 x 3,00,000
= Rs. 1,20,000
Now according to the above 3 calculations, the maximum HRA deduction that Aradhana can claim under Section 80 C of the Income Tax Act will be the lowest of these figures, i.e. Rs. 54,000. Note that the remaining Rs. 48,000 of the HRA will be taxable as per her income tax slab. Taxpayers can compute applicable HRA rebates through manual calculations. However, an online HRA Calculator can easily give you quicker and more accurate results.
Can I Claim HRA and Deductions on Home Loan Interest?
Taxpayers can claim both HRA as well as deductions on home loan interest and principal repayment amount if specific conditions are fulfilled, such as:
- You live in a rented place while having a house on loan in a different city
- You have secured a home through housing loan, but you reside in a rented house in the same city due to work or children’s schooling
- You have acquired an under-construction property on loan and therefore you live elsewhere on rent until building completion and possession
If your house is rented out and you live in a rented property, you will have to disclose your rental income or income from property for appropriate tax deduction.
Also Read: How to File your ITR for Home Loan
What If I Don’t Receive an HRA From My Employer
If you pay rent for your residential premises but do not receive HRA from your employer, you can still obtain deductions under Section 80 GG in the following circumstances:
- You are a self-employed or salaried individual
- You have not availed of HRA at any time during the year for which you wish to claim 80 GG rebates
- You, your spouse, minor child, or your family, which may constitute a HUF, should not own any residence at the place where you currently live or have an office for employment, business or profession.
Individuals who own house properties other than those mentioned here cannot claim benefits on the house as self-occupied. Any other property can be deemed let out to obtain the Section 80 GG exemption.
When Do You Need a Landlord’s PAN Card?
If your annual spending for rented housing exceeds Rs 1 lakh, you need to provide your landlord’s PAN card to avail of the HRA exemptions. In the absence of a PAN, the landlord has to sign a self-declaration stating s/he does not have a PAN card as mandated in circular no. 8/2013.
Things to Consider When Making HRA Deductions
While making HRA deductions, here are a few things you must bear in mind:
- You cannot claim HRA tax exemptions if you pay rent to your spouse
- If you have secured a house loan, you may obtain HRA concessions
- You may claim HRA if you stay with your parents provided you pay them a stipulated rent and hold valid receipts for the same
- You have to submit PAN details of your landlord if the rent paid in a year is more than Rs. 1 lakh
- If your landlord is an NRI, you must deduct TDS of 30% from the rent to obtain HRA in income tax exemptions
HRA and City Compensatory Allowance
Companies extend HRA to help employees take care of their rented housing costs. Additionally, they also provide wages to employees, publicly or privately, to compensate for higher living expenditures in metro or tier-1 cities, commonly known as City Compensatory Allowance (CCA). While one can claim tax exemptions up to Rs. 1 lakh for HRA, the CCA allowance is fully taxable. People working in tier-2 cities may be considered eligible for CCA in certain instances.
CCA depends on your pay scale and grade and not the basic salary resulting in wage variance by city. For example, a person working in Mumbai may get a larger CCA than someone based in Delhi or Bangalore.
How to Claim HRA When Living With Parents
In such a scenario, you need to legally pay rent to your parents and maintain the receipts. One has to sign a rental agreement with their parents and transfer the agreed sum every month. This will help you save taxes as well. On their part, your parents are required to report the rent they receive as earnings in their income tax returns. If their overall income is below the basic exemption limit or taxable at a lower tax slab, they can save tax on such family income.
How to Claim Deduction Under Section 80 GG
As per Section 80 GG, one can expect the lowest of the following for tax benefit:
- Rs. 5,000 per month
- 25% of the adjusted total income
- Actual rent should not exceed 10% of the adjusted total income
Adjusted total income is computed as: The total income minus your long-term capital gains, short-term capital gains under Section 111 A, income under Section 115 A or 115 D and deductions 80 C to 80 U (barring rebates under Section 80 GG).
Also Read: Types of ITR Forms
Frequently Asked Questions:
1.What are HRA and DA?
Employers pay House Rent Allowance or HRA to their employees for covering their house rent expenses. In addition, the government provides Dearness Allowance or DA to employees in the public sector to help them manage high inflation costs.
2.Is HRA 100% exempted?
Yes. According to Section 10 (13A), employees can claim a maximum HRA rebate up to their actual HRA component.
3.Can I claim both HRA and 80 GG Benefits?
No. Only the individuals who pay rent but do not receive HRA can claim deductions under Section 80 GG.
4.Can I claim HRA of less than 1 lakh?
Yes. If you wish to claim HRA under Rs. 1 lakh, you need to submit rent receipts.
5.Can HRA be 70% of the basic salary?
No. HRA can never exceed 50% of your basic salary.
6.When can I claim tax exemption on house rent allowance?
You can claim HRA tax exemption if:
- You live in a rented place
- You are a salaried person
- Your HRA comprises part of your salary
7.How can I claim HRA deductions?
As per House Rent Allowance rules and regulations, individuals can claim HRA deductions on the lowest of the three aspects:
- The amount of HRA paid by your employer
- 50% of your basic pay as HRA benefits if you live in a metro city. In a non-metro city, 40% of your basic salary qualifies for HRA deductions
- 10% of your basic pay minus the total rent paid
You will need to submit rent receipts to the employer/government when filing income tax returns (ITR).
8.I am a self-employed individual. Can I claim an HRA exemption?
Self-employed individuals can claim HRA exemption in income tax returns by filing Form 10 BA which essentially contains rent payment details. The amount one can claim will be the minimum value of the following factors:
- Rent paid more than 10% of the total income
- Rs. 5000 per month
- 25% of the net earnings
9.What is the tax liability in case my entire HRA is not tax-exempt?
The portion remaining on your HRA, which is not tax-exempt, is liable to be taxed according to prevailing tax rates.
10.Who can claim HRA exemption?
Salaried employees who pay rent and are also entitled to HRA as a part of their salary can claim HRA deductions to reduce their taxable salary, either completely or partly.
11.Which section of the income tax does HRA come under?
HRA is partially or wholly exempt as per conditions laid out in Section 10 (13A) of the Income Tax Act.
12.How to claim HRA in the Income Tax Return (ITR)?
Form 16 indicates the HRA exempt amount. The taxable portion of your HRA comes under ‘Salary as per Section 17’ in your ITR-1 form. And the amount exempt from taxation can be added to ‘Allowances to the extent exempt under Section 10’. Make sure it is included in salary income u/s 17 (1), (2) and (3).
13.How to claim HRA if it is not mentioned in Form 16?
If HRA is not mentioned in Form 16, it implies that your employer has not provided HRA as a separate component. In that case, you can claim the rent paid under Section 80 GG. When HRA is given as a separate component, it can be availed under Section 10 (13 A).
14.How to save HRA
When you stay with your parents who have modest income sources and do not fall in the taxable income slab, you can pay them a house rent. This way, you can claim HRA and they won't need to pay taxes either.
If you have taken a housing loan for acquiring your own home and yet live in a rented apartment, you can enjoy rebates on the principal amount under Section 80 C and the interest paid under Section 24. One can obtain both tax benefits on the home loan and HRA.
15.What is an HRA certificate?
HRA certificate is a certificate issued by a government employee for claiming HRA if they have not availed of government-prescribed accommodation.
16.How to submit HRA proof for ITR?
Documents like rent receipts and rental agreements must be furnished to the employer to claim HRA deduction. You may have to present your landlord’s PAN card if your rent payment is over Rs. 1 lakh in a single year. Once they receive suitable documentation proof, employers will provide exemptions for HRA in Form 16.
17.How much HRA can be claimed without proof?
None. To claim HRA exemption in income tax returns, you need to submit rent receipts if the rent paid is under Rs. 1 lakh; and the landlord’s PAN card if the rent is more than Rs. 1 lakh.
18.What happens if proof for HRA exemption is not submitted to the employer or HRA deduction is not claimed in ITR?
If you have not furnished rent receipts or rental agreement copies to your employer at the time of proof submission of the declared rent, you can claim the HRA deduction while filing ITR. In case you miss out on claiming the HRA while filing your tax return, you can also file a revised return to correct the error before 31st December of the assessment year or completion of assessment, whichever is earlier.
19.What is the maximum limit for HRA?
According to Section 10 (13 A), an employee can claim HRA deductions up to the actual HRA component as tendered by the employer.
