HRA, or House Rent Allowance, is a wage given by employers to staff members to cover housing costs associated with leasing a home. The HRA is a crucial part of a person’s pay. Both salaried and self-employed people are covered by HRA.
According to rule 2A of the Income Tax Rules, HRA for salaried individuals is accounted for under section 10 (13A) of the Income Tax Act. Similar to this, self-employed people are not taken into account for HRA exemption under this provision but may still be eligible for tax benefits under section 80GG of the Income Tax Act.
If you have opted for the new tax regime then you cannot avail tax exemption of house rent allowance. HRA is available only under the old tax regime.
How to Calculate HRA Exemption
In the section below, the process of HRA exemption is described in detail. But before this, let us take a look at the factors that affect HRA calculation and tax exemption on it.
Factors that affect HRA Calculation:
- Salary
- HRA Received
- Actual rent paid
- City of residence (metro, non-metro or rural)
HRA Calculation:
| Amit apartment rent | Rs.20,000 per month |
| Amit is eligible for a HRA equal to 50% of the basic salary | 50% of Rs.40,000 = Rs.20,000 |
| Actual HRA he receives from his company is | Rs.25,000 |
| Excess of rent paid over 10% of total salary | |
| Hence, net taxable HRA for Amit | Rs.25,000 – Rs.16,000 = Rs.9,000 |
HRA Exemption/Deduction
Salaried employees are eligible for HRA exemption for the income tax that they are required to pay each financial year. As per the Income Tax Act, for the calculation of house rent allowance, the least of the following three components is taken into consideration –
- Actual HRA received by the employer
- 50% or 40% of the basic salary depending upon a metro or a non-metro location, respectively
- Rent paid minus 10% of basic salary
Where, basic salary refers to basic + DA + commission on sale at fixed rate.
HRA Rules
Some of the most prominent rules pertaining to house rent allowance are mentioned below.
- For those who reside in non-metropolitan areas, 40% of the base pay is determined as HRA; for those who reside in metropolitan areas, the amount is 50%.
- In order to avail HRA benefit it is not necessary that you pay rent only to a landlord. Individuals can pay rent to their parents and show relevant receipts to claim HRA exemption.
- However, you cannot claim HRA exemption by showing that you pay rent to your spouse. This is not permissible under the income tax law.
- Rent receipts need to be submitted as proof in order to avail tax exemption benefit.
- Pan details of the landlord need to be furnished so that relevant tax deductions can be made from his/her income from property (rent received).
- PAN details of landlord are required only if the rent paid exceeds one lac rupees per annum.
- Employees who live in their own homes yet receive HRA are still subject to income tax.
How to make HRA Claim
If the rent paid in a financial year is more than Rs. 1 Lac, people must submit their rent receipts along with the landlord’s PAN information in order to file an HRA or home rent allowance claim.
According to a related circular, the Income Tax department has several technical platforms through which it can verify the information provided by tax payers in the event that the landlord does not have a PAN number. Therefore, making up information is never a good idea.
How to Claim Deduction Under Section 80GG
In order to claim deduction under Section 80GG of the Income Tax, the lowest of the following will be taken into account:
- Rs.5,000 per month
- 25% of the adjusted total income
- Actual rent which is 10% less of the adjusted total income
Adjusted Total Income is the total income minus the long-term capital gains, and short-term capital gains under section 111A, section 115A or 115D and deductions from sections 80C to 80U.
When is a Landlord’s PAN Required?
If you live in a rented house where the annual rent amount exceeds Rs.1 lakh then you will have to submit the PAN card details of the house owner. In case the owner does not have a PAN card then a self-declaration stating they do not have PAN must be signed as per Circular No. 8/2013.
Example 1
Jason is earning an income of Rs.3 lakh annually. He pays a rent of Rs.5,000 per month which is Rs.60,000 annually. In such case the deduction will be as follows:
| Condition 1 | Monthly rental limit of Rs.5,000 per month which is Rs.60,000 annually. |
| Rent paid which is Rs.60,000 minus 10% of the total adjusted income which is 30,000 which amounts to Rs.30,000 | |
| 25% of the total annual income which is Rs.75,000 |
In this case, the second condition is satisfied, hence an HRA of Rs.30,000 can be claimed.
In this case, the second condition is satisfied, hence an HRA of Rs.30,000 can be claimed.
What to Do If we Do not Receive HRA?
If your employer doesn’t pay your HRA, despite you living in a rented accommodation, you can still claim the deduction from your taxes as per Section 80GG. However, to claim this, certain conditions must be fulfilled which are mentioned below –
- You are a salaried/self-employed person
- You, your spouse, your minor child, or the HUF of which you are a member do not own any residential property where you now reside, perform official or employment-related activities, or conduct business or practice your profession.
- You have not received any HRA allowance in a year
How to Claim HRA when living with Parents
One approach to claim HRA while living with your parents is to enter into a rental agreement with them under which you agree to pay a set amount of rent to them each month. You may deduct the sum from your taxes by claiming it as HRA when you file your income taxes. However, on their income tax returns, your parents will need to disclose the rent you paid.
How do I claim HRA on my tax return (ITR)?
The taxable portion of the HRA component should be included in the ‘Salary as per Section 17(1)’ calculation. An exempt category is to be added under the heading ‘allowances to the extent exempt u/s 10’.
How do I claim HRA if not mentioned in Form 16?
If your Form 16 does not mention the HRA category, it means the component has not been provided by your employer. In that case your employer will have to provide you a separate component for HRA after which you can claim HRA under u/s 10(13A). In case no component is provided, you can claim exemption under Section 80GG.
How to Avail Tax Benefits on your Home Loan as well as HRA?
Tax benefits on HRA are applicable as long as you are paying rent for your accommodation. However, you can avail of tax benefits on your home loan as well as HRA tax benefits in case your own home is rented out and you are staying at a rented place. However, in such a case you need to disclose your rental income or income from the property from which suitable tax will be deducted by the government.