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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.
Updated on: 29 June 2023
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.
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:
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.
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.
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:
This is the amount of HRA the employee receives from their employer.
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.
The employee’s salary includes basic salary, dearness allowance (if any), and other fixed pay components.
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)
The lowest of the following three amounts is eligible for tax exemption:
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:
Leave Travel Allowance (LTA)
The least of the three is the HRA deduction that can claim for tax exemption which is ₹84,000 in Seema’s case.
To claim an HRA exemption, the employee must submit rent receipts or other supporting documents as per the employer’s requirements.
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:
To claim a deduction on home loan interest, you must:
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.
There are a few factors to consider to claim HRA when living with parents. Here are the points that can be followed:
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.
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.
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.
Ensure that your parents have proper ownership documents of their house. These documents could include property deeds, property tax receipts, or other relevant documents.
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.
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.
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.
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:
The total income referred to above is calculated after deducting other allowable deductions under various sections of the ITA.
To claim the deduction, you need to submit Form 10BA along with your income tax return (ITR). Maintain the following documents as evidence:
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.
Here are some things you need to keep in mind about HRA tax exemptions:
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.
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.
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.
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.
HRA exemption can be claimed by employees who meet the following conditions:
HRA comes under Section 10(13) of the Income Tax Act.
DA stands for Dearness Allowance. It is a cost-of-living allowance paid to employees to help them cover the rising cost of living.
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.
You can submit HRA proof for ITR by attaching the rent receipt, rental agreement, and employer’s HRA certificate to your 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.
Yes, you can claim 80GG and HRA, but only the lower amounts.
You need a landlord’s PAN if the annual rent exceeds ₹. 1 lakh.