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

HRA full form is House Rent Allowance, a key component of your salary designed to cover rental expenses. It offers a significant tax benefit under Section 10(13A) of the Income Tax Act, but its exemption amount is determined by specific calculation rules. Grasping these is fundamental for employees to accurately claim HRA and optimize tax savings.

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What is HRA (House Rent Allowance)?

House Rent Allowance is a specific component included in an employee's salary structure by their employer. Its primary purpose is to provide financial assistance towards the rental expenses incurred by the employee for their accommodation.

You may now wonder, “what is HRA exemption?” It is the most significant aspect of receiving HRA is its potential for tax relief. Under Section 10 (13A) of the Indian Income Tax Act, salaried individuals who live in rented accommodation can claim a deduction for the HRA, reducing their overall taxable income.

It is important to note that the entire amount of HRA received is not automatically exempt from tax. The actual exempt amount depends on specific calculations prescribed by the tax laws. Understanding these nuances is crucial for employees to claim the correct exemption.

Moreover, if the employer lives in their own home and does not pay rent, HRA becomes taxable and is included in the taxable income.

Who Can Avail of HRA?

The benefit of HRA in income tax is primarily available to salaried individuals whose salary structure includes house rent allowance as a component. If you are an employee and receive HRA from your employer, you are on the first step to potentially claiming this tax benefit. This allowance is specifically designed for those who bear rental expenses.

An important condition to avail of HRA exemption in income tax is that you must actually be living in a rented accommodation and paying rent for it. Simply receiving HRA in your salary isn't enough; you need to incur rental expenses to be eligible for the tax relief associated with this allowance.

Therefore, if you reside in your own house or in a house for which you do not pay any rent, such as living with parents without a formal rental agreement and actual payments, you cannot claim HRA exemption. In such scenarios, the entire amount becomes fully taxable.

It is also worth noting that you can claim HRA exemption even if you own a house in a different city but are residing in a rented property in your city of employment. The key is that you are paying rent for the accommodation you currently live in and for which you are claiming the HRA exemption.

HRA for Self-employed Individuals

While self-employed individuals and salaried employees without HRA do not get the straightforward benefits of HRA rule for income tax, Section 80GG provides a valuable alternative. Understanding how this section works can help you make the most of the tax benefits available to you. Whether you’re self-employed or simply not receiving HRA, do not miss out on the opportunity to lower your tax liability by claiming this deduction.

HRA for Salaried Individuals

Understanding what is HRA meaning and how it works can make a big difference in your tax planning. It is one of the easiest ways to reduce your taxable income if you are living in a rented house. Make sure to keep all your documents in order so you can claim the maximum benefit without any hassle. And if you are ever in doubt, a quick chat with your HR department or a tax consultant can help clear things up.

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.

How to Claim HRA Exemption

HRA plays an important part in managing salaried individuals’ monthly expenses. It will help determine how you will utilize your salary for other remaining monthly expenditures. Once you know what is HRA, you should note the following factors to claim the exemption:

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 limits.

How to Calculate HRA Exemption

When calculating your tax liability, you must compare the following figures and take the lowest one as the HRA deduction amount:

Actual HRA received
Rent paid - 10% of salary
50% of your salary if you live in a metro city (40% of your salary if you live in a non-metro city)

Here, the salary amount will include your basic salary and dearness allowance.

Example of HRA Calculation

We can understand the above rule with an example. Suppose you live in a rented house in Delhi and receive HRA as part of your salary as per the following table:

Basic Salary + Dearness Allowance	₹12,00,000
HRA Received	₹1,00,000
Rent Paid	₹2,00,000

The exemption amount will be the least of the following:

HRA Received	₹1,00,000
Rent Paid - 10% of Salary	(₹2,00,000 - 10% of ₹12,00,000) =₹80,000
50% of Salary	(50% of ₹12,00,000) =₹6,00,000
Lowest of them all	₹80,000

So, you can claim ₹80,000 as an HRA tax exemption. The balance HRA of ₹20,000 (₹1,00,000 - ₹80,000) will be taxed under the head salary.

HRA Calculator

The above calculation can be a bit overwhelming. You can use our free online HRA calculator to make the process easier. By entering key details like salary components, rent paid, and location, you can find out how much of your HRA is eligible for exemption. Try it now and plan your tax savings better in just a few clicks.

Documents Required for HRA Exemption Claim

Proper documentation is essential when claiming an HRA tax exemption to ensure compliance with tax regulations and maximize your tax benefits.

Rent Receipts
Rental Agreement or Lease Deed
Letter from Landlord
Rent Payment Mode Proof
Form 12BB
Salary Slip

Conditions for Claiming HRA Exemption

While receiving HRA is the first step, claiming an exemption on it requires fulfilling certain specific conditions as laid down by the Income Tax Act. Adherence to these conditions is mandatory to avail of the tax benefit associated with House Rent Allowance in income tax. Here are the key conditions you must satisfy:

You must be a salaried employee.
HRA must be a part of your salary structure.
You must be living in a rented accommodation.
You must be paying rent.
The rented premises should not be owned by you.
If applicable, submit the rent receipts.

How to Claim HRA When Living with Parents?

You can claim rent exemption in income tax while living with your parents, provided the arrangement is genuine and you fulfill specific conditions. The key here is to establish a formal landlord-tenant relationship and ensure actual rent payments are made.

To legitimately claim HRA in this situation:

Have a written rental agreement with your parents (who must be the property owners) specifying the rent amount.
Pay rent to your parents, preferably through banking channels for a clear record.
Your parents must report the rent you pay as rental income in their income tax returns and pay applicable taxes on it.

Let us understand this with an example. Let us say Priya lives with her parents in a house owned by her mother and receives HRA as part of her salary.

Priya and her mother enter into a rental agreement where Priya agrees to pay a monthly rent of ₹15,000.
Every month, Priya transfers ₹15,000 to her mother's bank account and obtains rent receipts.
When filing her taxes, Priya can claim HRA exemption based on the ₹15,000 monthly rent paid (subject to the HRA calculation rules).
Priya's mother, in her income tax return, will declare ₹1,80,000 (₹15,000 x 12) as rental income and pay tax on it after claiming a standard deduction of 30% (₹54,000) and any property taxes paid.

By structuring it this way, the transaction is genuine, and both parties fulfill their tax obligations, allowing Priya to legitimately claim HRA exemption. Without such an arrangement, the claim could be viewed as a tax avoidance measure rather than a legitimate expense.

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, your spouse, or your minor child should not own any residential accommodation in the location where you currently reside or perform your duties.
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 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.

Conclusion

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 understanding what is 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.

FAQ on What is HRA

When can I claim tax exemption on the HRA?

If you are an employee and do not own a house in the city where you work, you can claim a tax exemption on the HRA.

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

No, you cannot claim an HRA benefit 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.

What is the tax liability if 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.

Who can claim HRA exemption?

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

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

Which section of the income tax does HRA come under?

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

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.

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.

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

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 tax 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.

Can I claim both 80GG and HRA?

You can claim 80GG and HRA, but only in lower amounts.

When Do You Need a Landlord’s PAN?

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

How much HRA exemption can you claim?

HRA tax exemption is the minimum of the following: actual HRA received, 50% of salary (for metro cities) or 40% (for non-metro cities), and rent paid minus 10% of salary.

What is an HRA certificate?

An HRA certificate is a document provided by your employer that details the HRA received and the rent paid, used for claiming HRA tax exemption.

What is the maximum limit for HRA?

There is no fixed maximum limit for HRA; it is calculated based on your salary, the actual rent paid, and the city of residence. The exemption is subject to the rules set by the Income Tax Department.