Pagar Khata -Staff Payroll & Attendance Management
Employers determine the amount of HRA to be paid based on factors such as salary amount, salary structure, and city of residence. HRA is applicable for salaried and self-employed people. However, self-employed people cannot avail of HRA exemption under Section 10(13A) under the Income Tax Act of 1961. On the other hand, they can avail of tax benefits on rental payment under IT Act’s section 80GG.
House Rent Allowance (HRA) is an essential part of an employee’s salary paid by an employer to cover rented housing costs. Only if you live in a rented house can you claim HRA exemption. Despite it being a part of your salary, rent allowance is not entirely taxable. HRA exemption is covered by Section 10(13A) under the Income Tax Act of 1961, as well as Rule 2A.
The rent allowance amount of the HRA exemption is deducted from total income before calculating taxable income. This way, an employee can save money on taxes. However, if an employee does not rent out accommodation and lives in their own house, the HRA received from the employer is fully taxable.
Several factors affect the HRA exemption rule
Salaried employees can avail of tax exemption on HRA from the income tax they must pay each fiscal year. According to the Income Tax Act, the least of the following three is taken into account when calculating house rent allowance exemption-
The salary that is considered for calculation purposes is 'basic salary.' If a bonus/commission is received based on sales turnover, then 'Dearness Allowance (DA)' is also added to the basic salary to calculate HRA exemption.
The tax benefit is only available to employees as long as they are staying in the rented accommodation.
Ms Kapoor lives in a rented accommodation in Mumbai and pays a rent of Rs 25000 per month. She has the below salary structure.
Monthly basic salary: Rs 60000 (Yearly: Rs 7,20,000)
Actual monthly HRA received from the company: Rs 25,000 (Yearly: Rs 3,00,000)
The lowest of the following amounts (per year) is exempted, and the remainder is taxable:
As per the above-mentioned HRA exemption rules, Rs 2,28,000 from the actual HRA received is tax-free. It will be deducted from her total salary to arrive at the taxable income. The balance of Rs 72,000 will get added to the employee's taxable income, as per the income tax rules.
To claim HRA exemption, employees need to mention the amount on the declaration form provided by their employer at the beginning of the fiscal year. If they cannot claim HRA through their employer, they can claim it by filing their tax returns using the ITR-1 form.
Employees need to submit their rent receipts, the PAN card details of the landlord (if the rent paid in a financial year exceeds Rs.1,00,000.) to avail of tax benefits on HRA. The employees can use the same receipt for three months. Therefore, for a year, you'll need at least the last four receipts.
Suppose the landlord does not have the PAN number. In that case, the Income Tax Department has a range of technical platforms through which it checks the information submitted by taxpayers.
If an employee has rented out their property to someone else and lives in a rented house, they can claim HRA deductions on the rent and the deductions for the house loan. In this scenario, the employee must identify his or her income from the property (for which he or she obtained the house loan) and pay the applicable tax.
If you have both owned and rented property in the same city, you cannot claim HRA tax exemptions on both. To qualify for the tax benefit as HRA exemption, the employee must show that their property is situated far from the employment site and cannot be used for residential purposes.
Self-employed people can also claim deductions and HRA tax exemptions for House Rent Allowance (HRA). They are eligible to receive benefits under Section 80 GG. Salaried employees can also use this section to claim tax exemptions when they do not receive HRA.
Section 80GG allows self-employed or salaried individuals to claim an HRA deduction or rent paid over 10% of their income or salary.
where adjusted income = Gross Income – long term capital gains – short term capital gains – section 80C to Section 80 U deductions (except 80 GG)
The lowest of the above three calculations will be exempted from tax.
The person claiming the tax exemption must not own the rented premises. If you live with your parents and pay rent to them, you can use the rent amount for HRA exemption from your salary. You cannot, however, pay rent to your spouse. If you are renting a residence from your parents, make sure you have a formal proof of those financial transactions. So it is crucial to keep track of rent receipts and your banking transactions because the tax agency may reject your claim if they are not sure that the transactions are genuine. Also, the rent you are paying to them gets added to your parent’s yearly taxable income.
Suppose your property is rented out or you work in another town. In that case, you can take advantage of the simultaneous benefit of deductions available for the home loan against 'interest paid' and 'principal repayment' and HRA deduction.
Some employees may not have an HRA component in their salary structure. In addition, a non-salaried individual may be paying rent. Section 80 (GG) of the Income-tax Act provides relief for them. An individual who pays the rent for furnished or unfurnished housing can claim a deduction for rent paid under Section 80 (GG) of the I-T Act. However, they must not receive HRA as part of their salary.
Suppose both the spouses are working and contributing to the house rent. In that case, they can both claim the tax rebate connected to the HRA if they can both provide separate rent receipts. Employees should take care to avoid any duplication or discrepancies. However, only one of them can claim the tax exemption for single rent payment.
We hope this article has helped you understand HRA and the related HRA rules and regulations. We have also discussed the different ways in which you can claim the HRA deduction. Now, you should be able to calculate your HRA deduction.
1. Does the HRA deduction vary for the metro and other cities?
Yes. HRA is determined by the place where you stay. Moving from a metro to a non-metro would decrease your HRA deduction from 50% to 40% of your base pay.
2. What are the documents required to claim the HRA deduction?
Rent receipts, a PAN Card of the landlord, and a photocopy of the rent agreement are required to claim HRA deduction.
3. Can I rent a house from my father to claim tax benefit on rent allowance?
Yes. You can pay rent to your father to claim an HRA deduction.
4. Can I avail of tax benefits on both House Rent Allowance and Home Loan?
Yes. If you furnish sufficient proof, you can claim tax exemptions on both HRA and home loan.
5. What happens if you work in a different city from the one in which you live?
In that case, for HRA calculation purposes, the city of residence is considered and not the place of work.
6. Can both working spouses avail of HRA tax benefit separately?
Yes. If both husband and wife are working and paying the house rent, they can both claim the tax rebate connected to the HRA if they can both provide separate rent receipts. You should take care to avoid any duplication or discrepancies.
7.Wha t if your employer refuses you the advantage of the Tax Benefit on HRA?
It's not a matter of concern if your employer refuses to give the tax benefit on HRA. You can claim this exemption when you file the tax return. You will get the exempted amount as a refund of the excess Tax Deducted at Source(TDS).
8. Can a self-employed person avail of HRA tax benefits?
Self-employed people can also claim deductions and HRA tax exemptions for House Rent Allowance (HRA). They are eligible to receive benefits under Section 80 GG.
9. What is the tax liability if your entire HRA is not tax-exempt?
After deducting tax at the applicable slab rates, the employee receives the balance of the HRA that is not tax-exempt.
10. Why is HRA deduction from an employee's salary?
The amount of the HRA exemption is deducted from the total income before calculating taxable income. This deduction allows an employee to save money on taxes. However, keep in mind that if an employee lives in his own home or does not pay rent, the HRA received from his employer is fully taxable.
Pagar Khata -Staff Payroll & Attendance Management