HRA Exemption

HRA refers to House Rent Allowances, which an employer provides to its employees in order to meet the expenses of rented accommodation. House rent allowance is defined under section 10(13A) and rules 2A of the Income Tax Act 1961. Generally, house rent allowances are taxable; however, the income tax act provides HRA exemption in certain conditions. Nevertheless, the Act also states the HRA exemption limits or maximum HRA exemption.

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Eligibility Criteria to Claim HRA Exemption

An individual is considered to be eligible to claim HRA exemption under section 10(13A) of the Income Tax Act, 1961 if he meets the following requirement:

  1. Salaried employee

    The person claiming HRA exemption must be a salaried employee. However, as per section 13(13A) of the Act, a self-employee may also claim the HRA exemption if residing in a rented house. 

  2. Rented house

    The assessee cannot claim the HRA exemption if he owns a house and resides in it. It is the basic criteria that one must live in a rented house to claim an HRA exemption. No HRA calculation can be made if he lives in his own home. However, an assessee may pay rent to the family member. It is not mandated by the statutory that an assessee cannot pay rent to his father, siblings, or any other family member. For example, if the house property belongs to the father, he may mandate his son to pay the rent. However, it is advisable for the son to maintain receipts for the rent paid to the father. He must possess the necessary documents to substantiate his proof of paying rent.

  3. Proof of rent paid

    The assessee must possess the receipt of a valid house rent. It means if an individual does not pay any rent and receives a house rent allowance from the employer, he is bound to pay tax, and the amount of HRA will be fully taxable.

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Calculation of HRA

One can calculate the exemption value of HRA on the basis of several factors. For example, it includes the actual rent that an employee pays, the HRA that an employee receives from the employer, and whether the employee resides in a metro or non-metro city. Therefore, the lowest amount among the three factors will be exempted from the taxable income while calculating HRA. 

Let us understand it broadly.

  1. HRA allowance

    HRA Allowance is the actual salary amount that an employee receives from his employer. Apart from basic salary, HRA allowance holds a separate column among salaries. 

  2. Actual rent

    The actual rent is the value that a tenant pays to his landlord. So while calculating the HRA exemption amount, the assessee can subtract the actual rent value from the 10% of the basic salary he receives from the employer.

  3. Metro and Non-metro city

    Four cities, i.e., Mumbai, Delhi, Kolkata, and Chennai, are considered metro cities in India. So, the employees residing in these cities are required to calculate 50 percent of their basic salary and Dearness Allowance (DA).

    In the case of non-metro cities, the employees are required to calculate the value of 40% of their basic salary and dearness allowance.

Let us see how to comprehend these values mentioned above.

One can consider the following example to comprehend the HRA formula better:

Mr. Aryasumant resides in Bangalore, where he carries on his work. He has rented accommodation where he pays INR 6,000 on a monthly basis. The salary he receives from his employer is:

Basic salary: INR 24,000

HRA: INR 9,000

Allowances: INR 9,000

PF (Provident Fund): INR 3,000

Hence, his total salary is INR 45,000

  • In the first step, the assessee must calculate the total HRA received annually. So, his annual HRA is,

=9000 x 12

= INR 1,08,000

  • In the second step, he must assess the rent he pays the landlord - 10% of his basic salary. It can be further calculated as,

Actual rent = 6,000 x 12

= INR 72,000

10 percent of the basic salary

Basic salary = 24,000 x 12

= INR 2,88,000

10 per cent of INR 2,88,000 = (2,88,000 x 10) / 100

= INR 28,800

Actual rent - 10 percent of basic salary

72,000 - 28,800

= INR 43,200

  • Since the assessee resides in a non-metro city, he must calculate 40 percent of his basic salary plus dearness allowance.

Basic salary = 24,000 x 12

= INR 2,88,000

Dearness allowance = 9000 x 12

= INR 1,08,000

Basic salary + Dearness allowance

288000 + 10800

= INR 2,98,800

40 per cent = (298800 x 40) / 100

= INR 1,19,520

The lowest amount falls under the HRA exemption. In this case, the lowest amount will be,

INR 1,08,000

INR 43,200

INR 1,19,520

= INR 43,200/-

Conclusion

An employee does not become eligible for HRA exemption if he receives the allowance from the employer. Certain conditions should be satisfied, and the employee must reside in rented accommodation. In addition, the HRA he receives annually cannot be fully exempted from the taxable income. An assessee may claim the HRA exemption even if he resides with the parents, provided the house property must belong to either parent. In addition, he must furnish substantial evidence proving that the assessee pays rent to the parents. However, the rent paid to the spouse is not eligible for HRA exemption. It is important to note that if the annual rent exceeds INR 1,00,000, the assessee must furnish the landlord's PAN card to claim HRA exemption. In the absence of a PAN card, he can produce the signed declaration of the landlord.

FAQ's

  • Under which sections of Income Tax Act an assessee may claim the HRA exemption?

    An assessee may claim the HRA exemption under section 10 (13A) or section 80 GG of the Income Tax Act 1961.
  • Can I claim an HRA exemption while paying the rent to a family member?

    Yes, an assessee may pay rent to a family member in order to claim HRA exemption, provided the house property must belong to the family member who collects the rent. It is provided further from the precedents that the HRA exemption cannot be claimed if the assessee pays the rent to the spouse.
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