HRA or House Rent Allowance is a salary component of the pay structure which is paid by employers to employees. It is an important element in an employee’s salary as HRA provides tax benefits for payment made on accommodation. The settlement about the amount of HRA to be paid to an employee is determined by various criteria like the salary and the city where the employee is stationed. The provision of Section 10(13A) of the IT Act regulates the House Rent Allowance in India.
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Salaried individuals are given the privilege of House Rent Allowance benefits while self-employed individuals are excluded from claiming HRA benefits. To be approved for HRA benefits the employee is required to be occupying a rented accommodation with the monthly rents payable to the landlord. An employee can also claim HRA benefits if he / she pays rents to his parents or relative by submitting rent receipts as prove of rent payment.
Producing two receipts of the rent payments should suffix as the proof for availing HRA benefits. One of the two receipts should be rent paid at the start of the financial year and the other must be, one paid towards the end of the financial year.
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How does an employer decide on how much HRA to pay?
The amount for House Rent Allowance to be paid to an employee is generally based on the Basic Salary. Other factors that act as the deciding ingredient for HRA amount is the city where the employee is stationed; in the case, for employees who reside in metro cities, an entitlement of 50% of the Basic Salary is the HRA percentage for other cities the percentage is 40% of Basic Salary.
To calculate the House Rent Allowance amount, components like the sum of Basic Salary, Dearness Allowances and any other commissions play vital roles.
The HRA provided to employee will be the lowest of the following three allocations:
- The actual amount received as HRA from the employer.
- Actual rent paid reduced by 10% of Basic Salary.
- 50% of Basic Salary for employees stationed at metro city and 40% for non-metro city residents.
Proofs Required for availing HRA Exemption
There will be no documentary proof required if your HRA claim is up to Rupees 3000 per month. If the claim amount exceeds the limit of Rupees 3000 per month then you will be mandated to produce certain documents as proof of accommodation payment.
- The Rent Receipts: A fully filled Rent Receipt with the complete details of the residency address, landlord’s name, amount of rent paid, signature of the landlord verifying the payment acceptance etc. along with a 1 Rupee revenue stamp.
- Rental agreement in some cases: If the monthly rental amount exceeds Rupees 15000 per month (Rupees 1,80,000 per annum) then PAN Details of the landlord should be produced mandatorily for claiming the HRA exemption.
What are the factors inclusive in HRA Exemption Rules?
- If an employee does not pay any rent then he / she cannot request for HRA exemption scheme.
- The HRA exemption is calculated monthly, in order to keep the pay structure update in accordance with the employee’s salary appraisal, change in rent paid or transfer to another city.
- If an employee resides with his / her family or relatives and pays a rental amount monthly then, the individual must make the transfer of rent payment through bank transfer so that he / she can produce proof to make the claim.
- The HRA policy states that an employee will have the benefit of claiming HRA amount even if he / she is a property owner but resides in a different city where he has occupied a rented accommodation. No provisions can stop an employee from owning real estate property.
- No exemption will be applicable under Section 80GG if the HRA deduction is allowed under this section.
- One can claim for exemptions under section 10(13A), section 80C (repayment towards housing loan) and section 24b (interest paid to banks on the home loan) during the same time.
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Individuals who pay rent for accommodation but are not allowed to claim HRA
There are some cases where employees do not have an HRA component in their salary structure but still has the liability of paying monthly accommodation rent, under such circumstance Section 80 (GG) of the Income-tax Act comes into effect. When an individual is paying rent for either furnished or unfurnished accommodation, he / she is applicable to claim the rent payment deduction under Section 80 (GG) of the Income Tax Act.
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One can also pay rent to parents or grandparents to remove taxable income and save up on Income Tax. Although parents or grandparents are the landlords of the house but the property should be under the same name as shown in the rent receipt.
The accommodation occupied by the claimant (i.e. the family home), cannot be signed under the person making claim for the Tax exemption. However, paying rent to one’s spouse cannot be verified as valid to avail HRA benefits, as it is stated that after marriage the couple is supposed to automatically share an accommodation together.
HRA benefits on Home Loans
If an individual pay for a home loan and he / she avails tax benefits for the loan, the individual can still benefit from the HRA allowance provided by the employer. This is applicable when the employee owns a property but has rented out that accommodation to someone else while he / she themselves occupy a rented accommodation belonging to someone else.
This allows the employee to earn from his own property while benefiting from HRA policy which eventually lessens his / her burden of paying rent for the accommodation he has occupied.
Frequently Asked Questions
Q. How are HRA considered for a salaried individual and a self-employed professional?
House Rent Allowance for salaried individuals is accounted under Section 10(13A) of the Income Tax Act, 1961, in agreement with rule 2A of Income Tax Rules (HRA Exemption Rules). Whereas, self-employed professionals cannot avail exemption under HRA act, as they are not paid by an employer.
Q. Can self-employed individual claim for House Rent benefit?
Self-employed individuals can claim for HRA benefits for the rent payment they incur, by filing for the claim under Section 80(GG), subjected to certain conditions.
Q. What are the factors considered in calculating the HRA for the salaried individual?
The factors that are accounted for calculating HRA for tax emption are The Basic Salary, HRA received, actual rent paid by the employee and the city of residence. If these salary components remain the same then tax exemption is calculated on an annual basis. When the salary components are subjected to change based on the hike in pay, rent or shifting of residence then the HRA is calculated on monthly basis.
Q. Does an employee’s city of residence have anything to do with HRA?
The city where an employee resides also has a significant part in HRA calculation; for a metropolitan city, the HRA tax exemption is 50% of the Basic Salary while in non-metropolitan cities the HRA is 40% of Basic Salary.
Q. Can an individual pay rent to his / her parents for availing HRA benefits?
Yes, employees can avail HRA benefits in such cases he / she needs to furnish details regarding the payments on rent by producing a rent receipt.
Q. What are the proofs required for submission claim for House Rent Allowance?
An employee must submit proof of rent paid, by providing rent receipts; one receipt must be a receipt paid at the beginning of the year while the other receipt being the payment made at end of the financial year. A one rupee revenue stamp affixed with the signature of the claimant must be submitted as well, along with other details like; the rented accommodation address, the amount of rent paid, the name of the landlord etc.
Q. Can an employee simultaneously avail tax benefits on home loan as well as HRA?
Home loan and HRA are two different entities and have no direct bearing on each other, thereby, tax benefits for both are separate. When an individual continues paying rent on his / her accommodation, he / she has the privilege of making claims for tax benefits on the HRA part of the salary as well as availing tax benefits on the home loan. This case is, however, relevant only if the home loan is made towards a property located in a different city.
Q. What can one do if he / she forgets to submit the rent receipts to the employer?
The good thing about HRA is that it can also be claimed directly on one’s Income Tax Returns. If a person couldn’t submit the rent receipts to the company HR on-time then he / she can claim HRA amount while filing for Income Tax Returns.
Q. What can a person do if his / her landlord does not provide him / her with the landlord’s Personal Account Number?
There is no other option available to overlap the HRA claim procedure if the rent paid for accommodation is more than Rupees 1 lac in a year. It is mandatory that the applicant should submit his / her landlord’s Personal Account Number in order to claim for HRA benefits.