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What is HRA (House Rent Allowance), and How is HRA Exemption Calculated?

Do you live in rented accommodation and pay for it every month? If yes, you could be eligible for a tax exemption on your rent. Read ahead to learn more about HRA.

  • 530,626 Views | Updated on: Mar 12, 2024

Are you aware of the financial benefits of paying house rent that you can avail as a salaried employee? If not, it’s time to expand your understanding of HRA (House Rent Allowance). Delve deeper into the topic of HRA exemption and HRA calculation in order to save taxes through this excellent tax exemption scheme introduced by the government.

HRA, or House Rent Allowance, is received by many salaried people and is included in their pay. But did you know that you could get an HRA exemption from taxes if you live in a rented house? Under Section 80GG, you can claim for exemption if you are salaried or self-employed. This blog will discuss what HRA is, how it is calculated, and how you can claim the exemption.

What is HRA (House Rent Allowance)?

An employer gives a house rent allowance as a subsidy for an employee’s rented accommodation. You are still eligible to use this exemption even if you work for yourself or your company does not provide an HRA. But the catch is that the house rent allowance is exempted from tax only if you live in a rented house.

So people who have a place of their own and get HRA from their employer cannot reap the benefits of claiming tax deductions under the HRA exemption section. Let us take a look at HRA for self-employed and salaried individuals:

HRA for Self-Employed Individuals

For self-employed individuals, there is no provision for HRA exemption. However, they can claim a deduction under Section 80GG of the Income Tax Act (ITA). Salaried individuals who pay rent but do not receive HRA from their employer can also utilize this provision.

HRA for Salaried Individuals

For salaried individuals, HRA can be a significant component of their salary structure. The HRA amount is generally determined based on the employee’s basic salary, the actual rent paid, and the city where they reside. The amount of HRA received by an employee may vary depending on the company’s policies and the employee’s salary structure.

Calculating HRA and HRA Tax Exemption

HRA plays an important part in managing the monthly expenses of salaried individuals. It is necessary to calculate HRA to know how you are going to utilize your salary for other remaining expenditures throughout the month. Using online HRA calculation in salary, you can determine your HRA rebate.

Tax exemption from HRA is calculated using the following factors:

Actual HRA received

This is the amount of HRA the employee receives from their employer.

Rent paid

The actual rent the employee pays for the accommodation they are residing in. It includes the basic rent and other additional charges like maintenance but excludes charges like electricity, water, or other amenities.

Salary

The employee’s salary includes basic salary, dearness allowance (if any), and other fixed pay components.

Location of residence

HRA is related to the city or town where the employee’s rented accommodation is located. Different cities are categorized into different classes (e.g., metros, non-metros) with different HRA exemption limits.

The HRA exemption is calculated as:

HRA Exemption = (Actual HRA received) OR (Rent paid - 10% of salary)

  • 10% of the salary refers to 10% of the basic salary.
  • If the rented accommodation is located in a metro city, the exemption is 50% of the salary instead of 10%, and for non-metro cities, the exemption is 40% of the salary.

The lowest of the following three amounts is eligible for tax exemption:

  • Actual HRA received
  • Rent paid minus 10% of salary
  • 50% (or 40%) of the salary, depending on the location of the residence

The remaining amount, if any, is added to the employee’s taxable income and is subject to income tax as per the relevant tax slab rates.

It is also possible to calculate the HRA rebate manually. You can check out the HRA calculator on the income tax India website.

If the employee pays more than ₹1,00,000 in rental expenses yearly, they must give their landlord’s PAN number when filing tax returns.

Let’s take an example of a salaried individual named Ms. Seema Bhat, who resides in Mumbai. She lives in a rented apartment and pays a rent of ₹10,000, which totals to ₹1,20,000 annually. Given below are her monthly earnings:
A professional tax of ₹200 and a Provident Fund of ₹2000 are deducted from her monthly salary. Let’s calculate Ms. Seema’s HRA that she can claim from the salary based on the three factors we have discussed above:

Basic Salary

₹30,000

HRA

₹13,000

Conveyance

₹2000

Special Allowance

₹1250

Medical

₹1250

Leave Travel Allowance (LTA)

₹5000

Total

₹54,250

  • Actual rent paid annually minus 10% of basic salary = (₹10,000 x 12) - ₹36,000 = ₹84,000
  • Actual HRA given by the employer annually = ₹13,000 x 12 = ₹1,56,000
  • 50% of basic salary (annually) = ₹1,80,000

The least of the three is the HRA deduction that can claim for tax exemption which is ₹84,000 in Seema’s case.

Did You Know?

To claim an HRA exemption, the employee must submit rent receipts or other supporting documents as per the employer’s requirements.

What If You Don’t Receive an HRA?

Self-employed people, who do not receive an HRA component, can utilize the provisions of Section 80GG of the ITA to claim HRA exemption. This option is also available to salaried individuals paying rent if their employer does not provide an HRA.

Hence, when computing HRA exemption, make sure whether you are eligible to claim the deduction under Section 80GG or Section 10(13A) of the ITA.

HRA provides a tax benefit by allowing individuals to claim exemptions on the rent paid for their accommodation. You can claim HRA and deduction on home loan interest, subject to certain conditions. To claim HRA on home loan, you must:

  • Be an employee
  • Receive HRA in salary
  • Not own a house in the city where you work
  • Pay rent for a house in the city where you work

To claim a deduction on home loan interest, you must:

  • Have taken a home loan
  • Be repaying the home loan
  • Own a house

The amount of home loan interest you can claim is the actual interest you have paid on the home loan.

You can claim HRA and a deduction on home loan interest in your income tax return. You must provide proof of your salary, rent, and home loan payments.

How to Claim HRA When Living with Parents?

There are a few factors to consider to claim HRA when living with parents. Here are the points that can be followed:

Rental Agreement

Prepare a rental agreement between you and your parents for the portion of the house you occupy. This agreement should mention the amount of rent you are paying to your parents.

Rent Receipts

Ensure your parents provide you with receipts for the rent you pay. The receipts should contain details such as the amount paid, the duration for which it is paid, your parents’ name, address, and signature.

Rent Payment Mode

Pay the rent to your parents through a bank transaction or a cheque rather than in cash. It will help you provide evidence of the rent payment if required.

Ownership Proof

Ensure that your parents have proper ownership documents of their house. These documents could include property deeds, property tax receipts, or other relevant documents.

Separate Living Space

If you occupy a specific portion of the house, ensure it can be identified as a separate living space. It should have a separate entrance, a distinct kitchen area, and facilities that can be attributed to your portion of the house.

Employer’s Requirements

Check with your employer regarding their distinct requirements for claiming HRA when living with parents. Some employers may have additional forms or documentation that they require.

Submitting Documents

When filing your income tax return, include the rental agreement, rent receipts, and other supporting documents per your employer’s requirements. Keep the original documents safely with you.

How to Claim Deduction Under Section 80GG?

To claim a deduction under Section 80GG of the ITA, 1961 in India, which applies to individuals who do not receive an HRA, you must fulfill certain conditions and follow the prescribed guidelines. Here’s a step-by-step process to claim the deduction:

Eligibility Criteria

  • You must be an individual taxpayer, including self-employed individuals and salaried employees without HRA.
  • You or your spouse or minor child should not own any residential accommodation in the location where you currently reside or perform your duties.

Calculate the Deduction Amount

  • The deduction amount under Section 80GG is the least of rent paid minus 10% of your total income or ₹5,000 per month or 25% of your total income.

The total income referred to above is calculated after deducting other allowable deductions under various sections of the ITA.

Documentation and Evidence

To claim the deduction, you need to submit Form 10BA along with your income tax return (ITR). Maintain the following documents as evidence:

  • Rent receipts: Obtain rent receipts from your landlord for the rent paid during the financial year.
  • Rental agreement: Keep a copy of the rental agreement/lease agreement as proof of the tenancy.
  • Declaration: Create a declaration in Form 10BA stating that you fulfill all the conditions mentioned under Section 80GG.

Filing the Income Tax Return

  • Include the deduction amount calculated in Step 2 in the relevant section of your income tax return form (ITR).
  • Attach the necessary documents, such as Form 10BA and rent receipts, as supporting evidence.
  • File your ITR within the due date specified by the Income Tax Department.

It’s important to note that you cannot claim the deduction under Section 80GG if you live with your parents. The provision applies only if you or your spouse or minor child do not own any residential accommodation at your employment or business.

Things to Consider When Making HRA Deductions

Here are some things you need to keep in mind about HRA tax exemptions:

  • If you are paying rent to your spouse, you cannot claim an HRA tax exemption.
  • HRA exemption in income tax can be availed even if you have taken a home loan.
  • HRA can be claimed if you stay with your parents by paying rent to them and getting a receipt.
  • Submitting the PAN details of your landlord is mandatory if your pay annually exceeds ₹1 lakh.
  • In the case of an NRI landlord, a TDS (Tax Deducted at Source) of 30% has to be deducted from the rent before paying it.

Conclusion

Availing of tax exemption has been made easy with different government schemes. HRA plays a vital role in the lives of many salaried individuals, providing financial relief when it comes to housing expenses. This tax-saving benefit can substantially impact your overall income tax liability. By comprehending the fundamentals of HRA and the factors that influence its exemption calculation, you can make informed decisions about your housing arrangements and maximize your benefits. Remember, a thorough understanding of HRA empowers you to make the most of this allowance and secure a more financially sound future.

Key Takeaways

  • HRA is a tax exemption that can be claimed by salaried individuals who live in rented accommodation.
  • The amount of HRA exemption is calculated based on the actual rent paid, the basic salary, and the location of the residence.
  • Self-employed individuals can also claim HRA exemption under Section 80GG of the Income Tax Act.
  • You must submit rent receipts or other supporting documents to claim an exemption.

FAQ

1

When can I claim tax exemption on the HRA?

You can claim tax exemption on the house rent allowance if you are an employee and do not own a house in the city where you work.



2

I am a self-employed individual. Can I claim an HRA exemption?

No, you cannot claim an HRA exemption if you are self-employed. However, you can claim a deduction for the rent you pay for your residence under Section 80GG of the Income Tax Act.



3

What is the tax liability in case your entire HRA is not tax-exempt?

If your entire HRA is not tax-exempt, you will be liable to pay tax on the amount that is not exempt. The tax rate will depend on your income slab.


4

Who can claim HRA exemption?

HRA exemption can be claimed by employees who meet the following conditions:

  • They have not received any house rent allowance (HRA) from their employer.
  • They do not own a house and pay rent in the city where they work.

5

Which section of the income tax does HRA come under?

HRA comes under Section 10(13) of the Income Tax Act.

6

What is DA?

DA stands for Dearness Allowance. It is a cost-of-living allowance paid to employees to help them cover the rising cost of living.

7

How to claim HRA if not cited in Form 16?

Even if HRA is not mentioned in Form 16, you can still claim it by submitting a rent receipt and a copy of your rental agreement to your employer.

8

How to submit HRA proof for ITR?

You can submit HRA proof for ITR by attaching the rent receipt, rental agreement, and employer’s HRA certificate to your ITR:

9

What happens if evidence for HRA exemption is not submitted or HRA deduction is not claimed in ITR?

If you do not submit proof for HRA exemption to your employer or if you do not claim an HRA deduction in ITR, you will be liable to pay tax on the entire amount of HRA that you receive.

10

Can I claim both 80GG and HRA?

Yes, you can claim 80GG and HRA, but only the lower amounts.

11

When Do You Need a Landlord’s PAN?

You need a landlord’s PAN if the annual rent exceeds ₹. 1 lakh.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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