The majority of salaried individuals receive House Rent Allowance (HRA) as a part of their salary. HRA can be availed by employees staying in rented accommodations. These salaried individuals also receive tax exemption on HRA as per the Income Tax Act, 1961. However, due to Covid-19 and its effect, most of the salaried persons had to shift to their hometown, where they stayed with their parents. Now there is a lot of confusion in the mind of such individuals about whether they are eligible to receive HRA if they have stayed with their parents and if such individuals receive HRA, how will it impact their tax liability? Before answering these doubts, let us first understand the basics of HRA.
HRA & Tax Exemption
HRA forms part of the salary provided by employers to their employees. HRA is only available to salaried individuals. Salaried individuals who receive HRA and live in rented accommodation can claim a partial or full exemption under Section 10(13A). However, HRA received by employees not living in rented accommodation, is fully taxable. Also, HRA tax benefit can be claimed only for the actual rent paid by the employee. Thus, tax exemption on HRA is not allowed if the rent is not paid.
Computation of Tax Exemption on HRA received
Tax exemption on HRA received by salaried individuals is computed as lower of the following:
- Actual HRA received by the salaried individual.
- 50% of the salary (Basic Pay + Dearness Allowance) for employees living in metro cities, and 40% of salary for employees living in non-metro cities.
- Actual Rent paid less 10% of the salary.
Thus, if you are not staying at a rented accommodation, then your actual rent paid shall be Nil, and you shall not receive any tax exemption on HRA received as a part of your salary. This will also lead to an increase in your taxable income and ultimately your tax liability.
HRA & Tax Exemption while living with your parents
Many salaried individuals had to shift with their parents during Covid-19 and lockdowns. During this time, employees were allowed to work from home. In normal circumstances, employees staying in their own house and receiving HRA, do not get any tax exemption under the Income Tax Act. But if an employee is staying with their parents, then they can claim exemption towards HRA by making rental payments to their parents. However, in such cases, it becomes compulsory for parents to disclose this rental income in the Income Tax Return (ITR) filed by them. Also, a rental agreement needs to be duly executed and submitted by the employee as proof of payment.
Summary: HRA with Work from Home
It is important for salaried individuals to be aware of the HRA policies and their exemptions to take advantage of them. Due to Covid-19, the policy of Work from Home (WFH) is widely implemented all over the country and thus many employees are relocating to their hometowns. This has led to HRA attracting tax and increasing the tax liability of salaried individuals. Individuals living in their parent’s house can take advantage of exemption on HRA through the process explained above. Each and every salaried person should take appropriate measures to cushion their losses arising from increased tax liability due to HRA.