How is HRA Exemption Calculated_Banner_WC


How is HRA Exemption Calculated?_WC

Every citizen of India whose earning falls beyond a certain threshold must pay tax to the Government of India. The government uses the tax money to provide basic amenities to citizens of India as well as run welfare schemes for the needy. However, the government also offers tax exemption avenues to taxpayers using which citizens can use to save a lot of money. One such tax exemption avenue is the HRA or the House Rent Allowance. In this article, we look at what is house rent allowance, what is the HRA exemption section, how does one do HRA calculation and can one claim HRA exemption with Home Loan? Read on to know the answers.

What is HRA or House Rent Allowance?_WC

What is HRA or House Rent Allowance?

The HRA or the House Rent Allowance is the money paid by an employer to an employee to help them take care of their accommodation requirements. Most taxpayers think that only salaried individuals can claim HRA. However, this is not true – even self-employed individuals can claim HRA. The HRA exemption section allows taxpayers to save a lot of money. Section 2A of the Income Tax Rules is the HRA exemption section and deals with how much and how can one claim exemption on HRA. Section 10 (13A) of the Income Tax Act deals with house rent allowance for salaried individuals. This section, however, mentions nothing about how self-employed individuals can claim HRA tax exemption under Section 80GG of the Income Tax Act.

Both salaried and self-employed borrowers must also know that they can claim tax deductions on HRA only under the old tax regime. The new tax regime offers no tax deductions on HRA.

How is House Rent Allowance Calculated?_WC

How to Calculate HRA Exemption?

HRA calculation is easy. For salaried employees, the HRA is calculated using three different considerations:

1. Using the first method, the HRA is calculated based on the basic salary that the borrower is drawing. In this case, the HRA is 50% of a person’s basic salary if they are living in a metro city and 40% of the basic salary if they are living in a non-metro city.

2. The HRA can also be calculated based on the rent that the borrower is paying. In this case, the HRA is rent minus 10% of the taxpayer’s basic salary.

3. Lastly, the HRA can also be claimed as the actual HRA received by the employee.

If you are doing HRA calculation, there are a few things you must keep in your mind.

  • If you stay in a metropolitan city, your HRA will be calculated as 50% of your base salary and if you stay in a non-metropolitan city, your HRA will be 40% of your basic salary.
  • Many taxpayers assume that they can claim house rent allowance only if they are paying rent to a person or landlord that they are unrelated to. This is not the case, a borrower can pay rent to their parents and claim it as HRA. However, one cannot show that they are paying rent to the spouse and claim this as HRA.
  • You will need to submit rent receipts if you want to claim tax exemption on HRA. Further, you will also need to submit your PAN card details as well as the PAN details of your landlord.
  • A salaried individual can claim tax exemption only for the months they have paid the home rent and not the entire year.
  • Further, you cannot be the owner of the house for which you are claiming HRA. 

Now that we know how is house rent allowance calculated, let us answer some important questions related to HRA and Home Loan exemption. Borrowers often ask if they can claim HRA exemption with Home Loan. Our next section answers this question.

Can one Claim Both HRA and Home Loan Tax Exemption?_WC

Can one Claim Both HRA and Home Loan Tax Exemption?

These days, most people opt for a Home Loan to fund the purchase of their real estate property, primarily due to two different reasons. First, real estate has become quite expensive and it is nearly impossible for borrowers to afford to buy a home without external financial assistance. Secondly, Home Loan tax benefits allow borrowers to save a lot of money in the long run.

Under Section 80C of the Income Tax Act, one can claim tax exemptions up to a maximum of Rs.1.5 Lakh on payments made towards interest repayment and under Section 24(b) of the Income Tax Act, one can claim tax exemptions up to a maximum of Rs.2 Lakh on payments made towards interest repayment. Thus, a taxpayer can save up to Rs.3.5 Lakh per annum by way of a Home Loan. Further, partners can claim these tax exemptions separately, making it possible for them to save up to Rs.7 Lakh in taxes each year by way of a Home Loan.

The next question is can one claim HRA and Home Loan exemption together? The answer is yes. No section of the Income Tax Act states that one cannot claim both HRA and Home Loan interest exemption together. However, if the amount you are claiming as HRA is quite high, know that the income tax department will ask you to explain why you are staying in a rented apartment when you already have a home. In conclusion, it is possible to claim both HRA and Home Loan exemption but if you are doing so, expect to face some scrutiny from income tax officials and be prepared with your answers.

*Terms and conditions apply.

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