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House Rent Allowance: Calculation and Tax Exemption

House Rent Allowance is an amount paid as a part of the salary by the employer to the employee. It is a tax benefit provided to the employee for the amount they pay for their rental accommodation every year. This benefit can be exercised by employees, self-employed and professionals to exempt the amount paid as rent. It is regulated under section 10(13A) of the Income Tax Act. It is believed to be the best saving tool for employees, saving up to 50% of your salary.

HRA (House Rent Allowance)

The Income Tax Act had provided an allowance to help the employee, self-employed or professionals with the amount paid as rent, this allowance is called House Rent Allowance. As the name suggest it is specially for individuals living in a rented accommodation. It is also provided for tax exemption.

Both in private as well as public sector organization, the salary of an employee comprises of various parts or allowances along with the basic salary. HRA is one of the various components of salary, which can be fixed or derived through a special agreement between the employee and the employer. Further, if the employer does not provide HRA, the employee can claim HRA deduction or exemption under section 80GG of Income Tax Act. Self-employed people can claim HRA deduction or exemption if the individual is living in a rented accommodation. They can also claim the amount under the same section.

Rules and Conditions to Claim HRA

The lowest among the following will be considered as the deductible amount of an individual under HRA:

  • HRA provided by the employer
  • 50% of the salary will be exempted if the employee lives in the metro city and 40% if he/she lives in any other city other than the metropolitan city.
  • The amount paid as rent by the individual minus 10% of his/her salary

The salary may be inclusive of all the commissions and dearness allowance along with the basic salary.

If the rental amount exceeds Rs. 1 Lakhs then the employee can claim HRA exemption by furnishing the PAN details of the owner along with the rent receipts.

To claim HRA the employee needs to submit two rent receipts, one from the beginning and another towards the end of the year. The two receipts should comprise of one rupee revenue stamp, owner/rent receiver’s signature, rental residence address, the name of the person who rents it and the amount of rent paid.

Further, for an employee with HRA and home loan, he can claim his HRA benefits if is paying for rental accommodation. Home loan is a separate entity from HRA and has no direct bearing on each other. This generally occurs when the employee is working in the different city and his/her home is in another.

If an employer does not provide HRA, the employee can claim HRA while filing income tax return. He/she can get the exempted amount as TDS refund.

In cases, where both husband and wife are working and paying the house rent, then both can claim exemption related to HRA if they can provide separate rent receipt for the paid rent. However, if they can provide only one receipt details then any one of them can claim the tax exemption.

Necessary Documents to claim HRA

If an employee wish to claim HRA or exempt tax related to HRA, then the employee should provide the following documents:

  • The tenant should provide PAN card details and a copy of the property owner, if the paid rent is more than Rs. 1 Lakh in a Financial Year.
  • The receipts of the paid rent should be provided by the employee comprising the following details:
    • Name of the owner
    • Name of the tenant
    • PAN card details of the property owner
    • Duration of the stay
    • Rented accommodation address
    • One rupee Revenue stamp with signature of the owner on it
  • The employee requires at least three receipts as the same receipt can be used for a period of 3 months.
  • A photocopy of the rent agreement (if required)

HRA exemption under section 80

Under section 80 of Income Tax Act, the HRA is provided only to the employee when he or she pays the rent to the owner. There is no exemption related to HRA for the period where he/she did not pay the rent. If the employee change salary or job location may be from a metro city to a non-metro city or vice-versa, the exemption will be different as HRA is calculated on monthly basis.

If the rent is paid to a family member other than father then the employee can claim exemption related to HRA, but the rent should be paid every month and only through online transaction. This will help the Income Tax Department to deduct the expenditure easily.

The HRA exemption available under section 80GG are available only if the individual had not claimed the exemption under any other section of the IT Act. Self-employed, professionals and employee without house rent allowance can claim their exemption related to HRA under this section.

Other HRA-related conditions under section 80 GG are as follows:

  • The house rent allowance for HUF and the individuals
  • If the individual does not get any exemption under section 10(13A), then the self-employed or salaried people can claim their Tax refund related to HRA
  • In an HUF, if the person is a self-employed/salaried member with a minor child or the spouse do not have ownership of any accommodation
  • The individual should not claim tax benefits for any self-occupied property that they own at some other place
  • If an individual is claiming tax exemption under section 80 GG then he/she should furnish form 10BA and prove that he/she satisfies all the conditions.
  • Tax exemption related to HRA is available if the paid rent is between 10% - 25% of the income/salary. An individual both self-employed or salaried person can claim tax exemption in relation to HRA is more than 10% of the individual income/salary, where the upper ceiling is 25%.

HRA for Salaried Personals

In accordance with Rule 2A of the IT Rules the House Rent, Allowance for a salaried person is accounted under section 10(13A) of the Income Tax Act,1961. Self-employed individuals can claim tax exemption under this section if he/she subject to certain conditions.

The factors that a salaried person should consider while calculating the HRA are as follows:

  • Salary
  • HRA received
  • The place of the resident as the exemption rate varies from metro to non-metro city.

If the above condition remains stable throughout the financial year then the HRA has calculated annually. If there is a variation in any of the above conditions then the HRA is calculated on monthly basis. The residence place is important as HRA tax exemption for the metro city is 50% of the basic salary and 40% of the basic salary for the non-metro city. In case, if you are staying in a non-metro city and working at metro city then, the city of your residence will be considered for HRA calculation.

Further, you can pay tax to your parents but the individual need to pay tax or consider the amount while calculating the liable tax.

The Process of Computing HRA Exemption

To calculate HRA of a salaried person let’s consider the following two illustrations:

Illustration1

Mr. Sahil. He is entitled to a basic salary of Rs. 5,000/- per month with a dearness allowance of Rs. 1,000/- and 40% of the salary forms part of his retirement benefits. He stays at a rental accommodation at Delhi and pays Rs. 2,000/- per month.

Then the salary structure of Mr. Sahil is:

Salary Rs. 60,000/-
Dearness allowance Rs. 4,800/-
Total salary Rs. 64,800/-

Then the minimum tax exemption for Mr. Sahil will be as follows:

Actual HRA received Rs. 24,000/-
Rent paid Rs. 17,520/-
50% of the salary Rs. 32,400/-

Therefore, Mr. Sahil will get a tax exemption of Rs. 17,520/

Illustration2

Mr. Raj is a 25 years old employee of an IT firm, in Bengaluru. He is from Chennai and stays at Bengaluru at a rental accommodation paying Rs. 15,000/- per month as rent. Then, Raj’s pay slip will be:

Rs. Rs.
Basic Salary 40,000/- PF 2,500/-
House Rent Allowance 25,000/- Professional Tax 200
Travel Allowance 2,000/-
Special Allowance 3,000/-
Medical Allowance 1,250/-
LTA 5,000/-
Total Earning 76,250/-

Raj’s HRA is subjected to 3 conditions given by his employer:

Condition1:

Actual rent paid – 10% of the basic salary

Then, as per Raj’s pay slip

Rs. 15,000 – 4,000 = Rs. 11,000/-

Condition2:

50% of the Basic Salary (as he is staying in a metro city. If he is staying in a non-metro city then it will be 40%)

Then,

50% x Rs. 40,000 = Rs. 20,000/-

Condition3:

The actual HRA Raj received from his employer, i.e. Rs. 25,000/-

Then,

HRA received – minimum amount among the 3 conditions

i.e. Rs. 25,000 – Rs. 11,000 = Rs. 14,000/-

Therefore, Rs. 14,000/- will be added to Mr. Raj’s taxable income.

Moreover, there are many HRA calculating tools available online, which an individual can calculate in accordance with the income.

Dates to file ITR and clear HRA tax exemption

The last date to file the ITR for a salaried personal who wants to claim HRA tax exemption in relation to HRA along with other tax is 31st July of the financial year.

And the last date of filing ITR for self-employed personals are as follow:

  • If they do not require audit over the income then the last date is 31st July of the FY
  • If the income needs to be audited then 30th September of the FY

Some Special Cases

Some of the special cases that an individual may come across while claiming HRA benefits are as follows:

  • Paying rent to a family member: If the individual is paying rent to his/her family members other than spouse and wants to claim tax exemption related to HRA, then the rented premises should not be in his/her name. For example – If an employee is staying with his/her parents and paying them on monthly basis as rent then he/she can claim tax exemption.
  • Staying in rent though own a house: An employee can claim double benefit if he/she is working in a place by staying in a rented house and renting his own house to someone else at somewhere else.
  • Individual with no HRA but pays rent: If the employer does not include HRA in the salary then the employee can claim tax exemption while filing ITR. Moreover, if you are a self-employed personal you can claim for tax exemption in relation to HRA under section 80 (GG) of IT Act.

Conclusion

To conclude tax exemption is a relation to HRA is available for both salaried as well as self-employed or professional personals. Hover, it is very significant to calculate their HRA carefully as it is an important tool to claim maximum Tax or TDS refund. It is calculated monthly or annually depending on the stability of the income, rent amount and residence of the individual. To conclude tax exemption is a relation to HRA is available for both salaried as well as self-employed or professional personals. Hover, it is very significant to calculate their HRA carefully as it is an important tool to claim maximum Tax or TDS refund. It is calculated monthly or annually depending on the stability of the income, rent amount and residence of the individual.

Frequently Asked Questions

Q. Is it possible to obtain tax benefit on both HRA and Home Loan?
Yes, you can claim both if you are an owner paying the home loan and at the same time leaving in a rented accommodation paying rent too.
Q. Whom shall I pay my rent to claim HRA?
You should pay your rent to your landlord. However, the landlord can be your parents but 70% of the amount may be added to the taxable amount.
Q. My landlord does not have PAN card, is it necessary to quote his PAN details?
If your annual rent amount is less than Rs. 1 lakh then it is not necessary to quote your owner PAN details.
Q. How can I calculate my HRA?
You can calculate your HRA exemption as per the illustrations given above. However, there are easily accessible HRA calculators online.
Q. Can I pay rent to my Spouse and claim tax exemption on HRA?
No, you cannot claim the rent paid to your spouse. Moreover, it may lead to the problematic scenario to pay rent to your spouse.