written by Khatabook | July 16, 2021

House Rent Allowance (HRA)- Its Exemption, Calculation and Rules

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.

What Is HRA?

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.

HRA Exemption/Deduction

Several factors affect the HRA exemption rule 

  • Salary 
  • City of residence (non-metro and metro cities for HRA)
  • HRA received from the employer 
  • Actual Rent Paid by an employee

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-

  • Actual HRA received
  • 50% of the salary if the employee is residing in a metro city and 40% of the salary if the employee is living in a non-metro city.
  • The actual rent paid minus 10% of the salary.

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.

Example of HRA Calculation And HRA deduction

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:

  1. Actual HRA received (yearly) = Rs 3,00,000
  2. 50% of basic salary (stays in a metro city) = Rs 3,60,000 (50% of Rs 7,20,000)
  3. Excess of annual rent paid over 10% of yearly basic salary = Rs 2,28,000 (Rs 3,00,000 - (10% of Rs 7,20,000)

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. 

Also Read: Conveyance Allowance- Definition, Limit, Exemption and Calculation 

HRA Deduction Rules

  • Employees must provide the landlord’s PAN card information. However, it is required only if the annual rent received by the landlord is more than Rs 1,00,000.
  • Rent receipts must be submitted as proof to receive the tax exemption benefits.
  • It is not always necessary to pay the rent only to a landlord to qualify for HRA benefits. Individuals can claim HRA exemption by paying rent to their family members (parents) and showing relevant receipts. 
  • You cannot, however, claim HRA exemption if you show rent to your spouse. This method is not permitted by income tax law.
  • HRA received by an employee who lives in his or her own home is not tax-deductible.
  • When claiming a tax deduction, keep in mind that the individual, spouse, minor child, or member of the (HUF) Hindu Undivided Family must not own any property. Furthermore, no deduction is allowed if a person owns any residential property in any location and earns rent from it.

Details About Claiming HRA Exemption

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. 

Utilising Both Rent Allowance And Home Loan Tax Benefits 

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.

HRA Exemption For Self Employed

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.

Actual Tax Exemption For Expense Made Towards Rent, Under Section 80GG

Section 80GG allows self-employed or salaried individuals to claim an HRA deduction or rent paid over 10% of their income or salary. 

  1. The top limit is 25%, which indicates that rent paid in the range of 10% to 25% of income or salary is only eligible for HRA exemption/deduction.
  2. Or Rs 5000
  3. Or 25% of the total adjusted income, 

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.

Claiming HRA Tax Benefits In Some Special Cases

  • Paying rent to one of the family members

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.

  • The employee owns a house but works and stays in a different city

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.

  • Employees who are staying in rented accommodation but do not get HRA

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.

  • More than one family member pays rent

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.

Additional Considerations

  • Self-employed people can also claim benefits for their rental payments under Section 80 GG of the IT Act.
  • Those seeking Section 80 GG tax exemptions should not claim any tax benefits relating to a self-occupied property that they own elsewhere.
  • Those seeking deductions under Section 80 GG should be able to provide a self-declaration using form 10-BA. In the form, the individual must demonstrate that he or she meets all of the requirements.
  • In cases where employers fail to include HRA on Form 16, employees can claim refunds on excess tax deductions during ITR filing.
  • Homeowners who have housing loans and HRA as part of their pay can claim deductions for both HRA and home loan interest and principal repayment.
  • The HRA tax is calculated every month when there is a change in job location (i.e. relocation from non-metro to metro cities or vice versa) or a change in salary. As a result, the deductions or HRA tax exemptions vary for each period of change independently.
  • The government introduced a new tax regime in the Union Budget 2020. Individuals could choose between the old tax regime with exemptions and the new tax regime without certain exemptions. As a result, only individuals opting for the old tax regime can take advantage of the tax benefit of house rent allowance.

Also Read: Special Allowances in India- Taxation and Calculation 

Conclusion

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.

FAQs

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.

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