HRA - House Rent Allowance

Saving taxes on HRA can be tricky. Read the article to plan it right.

· 4 min read
HRA - House Rent Allowance

House Rent Allowance is one of the major components of salary paid by employers for the money required to accommodate and live to work for the company. Not only salaried individuals but also self-employed individuals can claim tax benefits related to house rent allowance. Here in this article, we will try to cover the points like what is HRA, house rent allowance tax exemption, house rent allowance calculation, etc.

What is HRA?

HRA stands for House Rent Allowance. House Rent Allowance means the amount paid by the employer to manage the expenses incurred towards a rented home. House Rent Allowance is exempted from tax up to a certain limit. Here below we will see how much of the House Rent Allowance is exempt from taxes.

Rules for HRA Exemptions

- Rent receipts are needed to be submitted to avail house rent allowance exemption
- PAN Card details of the landlord are needed to be mentioned to avail tax exemption benefits
- PAN Card details of the landlord are only needed to be mentioned if yearly income through rent is more than 1 lakh
- One can’t pay House Rent to their spouses. It is not permitted according to income tax law.

How to Calculate HRA?

House Rent Allowance exemption is calculated in different ways for salaried and non-salaried individuals. We will go through each of them:

Salaried

A part of House Rent Allowance is exempted under Section 10 (13 A) of the Income Tax Act 1961 for a salaried individual. The amount of House Rent Allowance exempted from tax is a minimum of these three possibilities

1. Actual amount of House Rent Allowance
2. 50% of Basic Salary (Metro cities *) or 40% of Basic Salary (Non-Metro Cities)
3. Rent - 10% of Basic Salary

Note - Metro cities: Mumbai, Delhi, Kolkata, Chennai

DA: Dearness Allowance: If an individual is living in any of these 4 cities mentioned above, then 50% of Basic Salary is considered for calculation. Here Basic Salary is referred to as basic + DA + commissions. For example, Sushant is living in Mumbai. His basic salary is 45,000 per month (inclusive of DA and commissions)

Sushant’s Details

Amount

Sushant’s House Rent

Rs 20,000

Actual HRA he receives

Rs 25,000

50% of Basic Salary (Mumbai)

Rs 22,500

Rent – 10% Basic Salary

Rs 20,000 - Rs 4,500 = Rs 15,500

Net Taxable House Rent Allowance

Rs 25,000 - Rs 15,500 = Rs 9,500

* This calculation is done on monthly basis

Non-Salaried or Self Employed

A part of House Rent Allowance is exempted under Section 80GG of the Income Tax Act 1961 for a non-salaried/ self-employed individual. The amount of House Rent Allowance exempted from tax is a minimum of these three possibilities

1.  Rent - 10% of Income
2.  25% of Income
3.  5,000 per month

One can avail maximum of Rs 5,000 per month of tax exemption. There is one condition for the non-salaried individual - you or your spouse or your children shouldn’t own house property at your work city. Here Income doesn’t include any Long Term Capital Gain or Short Term Capital Gain made in that financial year. For example, Soham is living in Mumbai. His earning is 45,000 per month.

Soham’s Details

Amount

Soham’s House Rent

Rs 20,000

Basic Deduction possible

Rs 5,000

25% of Income

Rs 11,250

Rent – 10% of earning

Rs 20,000- Rs 4,500=Rs 15,500

Net Taxable House Rent Allowance

Rs 25,000 - Rs 5,000=Rs 20,000

* This calculation is done on monthly basis

One should know how to save taxes, there are many ways available in our country through which we can get deductions and this is one of them. Tax Planning is a must in today’s world.


Frequently Asked Questions- House Rent Allowance

1. Can I pay rent to parents, to avail myself of a House rent allowance exemption?

Yes, you can pay rent to your parents but it is necessary to fill up the ITR form of that person to whom you are paying rent. You should have all the proof like financial transactions which show that you pay them rent every month. Keep a record of rent receipts and also financial transactions because your application for house rent allowance exemption from tax can be rejected by the tax department if they are not convinced with the authenticity of the documents which you provided. One can’t pay rent to their spouses, it is not included in Income tax law.

2. Can I Claim both the house rent allowance and home loan exemptions?

Yes, you can do that if you are living in one city and owning a house in a different city.

- Home loan principal is exempted under 80C up to 1.5 lakhs
- Under Section 24 Home Loan Interest / Loss from the property is exempted up to 2 lakhs
- Under Section 80 EEA, If a person had bought a house under affordable housing* then additional 1.5 lakhs of deduction of taxes from the interest payments of loan can be availed
- In addition to that, a person can also opt for House Rent Allowance based on the calculation we have done above

Affordable Housing* means the registered value of the residential property should be below 45 lakhs to avail this additional 1.5 lakh of deduction of tax benefits.

3. What if I am a salaried person but employer doesn’t pay me a House Rent Allowance? Can I get a Tax deduction?

Yes, You can opt for the tax deductions under section 80GG, the one which is opted by non-salaried or self-employed individuals, and avail of all the benefits provided to them.

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