Introduction of HRA

Having a House Rent Allowance as part of the employees’ salary provides an advantage to employees because they can claim an HRA exemption from the income tax authorities based on it. The HRA exemption is the most basic form of tax exemption, which is claimed by salaried workers in India. If an employee does not stay in his/her property but rather pays rent for his/her accommodation or if the employee pays rent to his/her parents for the benefit of staying with the parents, then the employee is eligible to claim a tax exemption of the House Rent Allowance which is paid by the employer.

While filing the income tax return, any employee must provide the break-up of his/her salary to the income tax department. This break-up of the salary will show the HRA which the employee is receiving and can claim a tax exemption. The HRA which an employee receives is linked to the amount of salary which the employee receives, and therefore the HRA rises with the salary of the employee. If the HRA of the employee rises, then the employee can claim a higher HRA exemption of this allowance from the income tax authorities. 

In case the employee receives a house rent allowance but does not pay any rent for his/her accommodation or stays on his/her property, then the house rent allowance which is received by the employee is fully taxable in the hands of the employee. For an employee to claim any HRA tax exemption, he/she must be paying rent to a landlord for his/her accommodation. 

How much HRA exemption can be claimed?

The amount of HRA exemption which a salaried employee can claim depends on a few factors. The income tax department has stipulated rules which must be followed while calculating the taxpayer's HRA exemption. The exemption which a taxpayer is eligible to receive is the least of the following three amounts:

• The actual amount of House Rent Allowance which the taxpayer receives;
• Fifty percent of the taxpayer’s basic salary plus dearness allowance (if the taxpayer resides in a metropolitan city) or forty percent of the taxpayer's basic salary plus dearness allowance (if the taxpayers reside in a non-metropolitan area); or
• The actual rent paid by the taxpayer minus ten percent of the total of the basic salary and dearness allowance of the taxpayer.

To understand the amount which can be claimed as an HRA exemption, the taxpayer can follow this example. Let us assume that the basic salary and dearness allowance of the taxpayer is Rs. 30,000 per month. The HRA which the taxpayer receives from his/her employer is Rs. 20,000 per month.  The taxpayer is living in a metropolitan city and pays a monthly rent of Rs. 15,000 for his/her housing requirements. For this example, we should assume that the employer has deducted the full TDS from the employee and therefore while filing his/her income tax returns, the taxpayer can claim a full exemption for the house rent allowance.

According to the above example, the exemption which the employee will be able to claim is the least of the following three amounts:

• The actual amount of House Rent Allowance which the taxpayer receives, which is Rs. (20,000*12) or Rs. 2,40,000
• Fifty percent of the taxpayer’s basic salary plus dearness allowance (since the taxpayer resides in a metropolitan city) which is Rs. (30000*50%*12) or Rs. 1,80,000
• The actual rent paid by the taxpayer minus ten percent of the total of the basic salary and dearness allowance of the taxpayer, which is Rs. (15000 – 30000*10%)*12 or Rs. 1,44,000

Hence, according to the given rules of the income tax department, in this example, the taxpayer shall be eligible to claim an exemption of Rs. 1,44, 000 from his/her house rent allowance. Since the tax exemption which the employee in the example is getting is Rs. 1, 44, 000 then the balance of the amount of the employee’s HRA, which is Rs. 96, 000 is fully taxable at the hands of the employee. 

How to claim the HRA exemption when filing the Income Tax Returns?

Once the taxpayer has calculated the amount of HRA exemption which he/she is eligible to claim from his/her income tax liability, the taxpayer needs to claim that exemption while filing his/her income tax returns. While filing the income tax returns, the taxpayer must correctly choose the form which applies to the taxpayer.

Upon choosing the correct form, which in most cases would be the ITR-1 form, the taxpayer will need to enter the break-up of his/her salary as demanded by the form. Here, the taxpayer will need to enter the basic salary, which excludes all the allowances and perquisites. Subsequently, the taxpayer will need to enter the number of his/her allowances, which are not exempt. Under this heading, the taxpayer will need to enter the non-exempt part of his/her HRA and add that to any other allowances which they receive, which are not tax-exempt.

The taxpayer also has to declare the amount of HRA which he/she is claiming as an exemption. While filing the ITR-1 on the income tax department website, the taxpayer must click on the fifth tab, which is “Taxes Paid and Verification”. Under this menu, there will be an option to enter “Exempted Incomes” which contains the option for “House Rent Allowance” under the “Others” button. The taxpayer should enter the exempt portion of his/her HRA under this heading.

The importance of keeping proof when claiming HRA exemption

The income tax department does not ask the taxpayer to submit the proof of his/her rent payments while the taxpayer is filing his/her income tax returns. However, while the income tax department is processing the taxpayer's claims, they may ask the taxpayer to submit proof of his/her rent payment in the form of the rent agreement or the financial statement. Hence, to avoid any adverse consequences, it is important to ensure that the taxpayer has his/her rent proofs in hands for the eventuality that he/she may need to produce it for the satisfaction of the income tax department.

A further advantage of having a rent agreement in place is that the taxpayer may give a copy of the same to his/her employer so that the employer can reduce the TDS which is deducting every month instead of the HRA exemption which the taxpayer is eligible to claim. Not every employer provides this facility, and regardless, the taxpayer can always claim his/her HRA exemption at the end of the year and receive a full refund of the amount.

Is there an exemption for house rent Allowance available to those who do not receive an HRA from their employer?

In case the taxpayer’s employer does not provide a house rent allowance, he/she can still claim an exemption if the taxpayer lives on rent. Section 80GG of the Income Tax Act provides for this exemption. The maximum amount of exemption which can be claimed under this section at present is Rs. 5,000 per month. It may be noted that the total exemption which can be claimed under Section 80GG is much less than the potential exemption for those taxpayers who receive a separate HRA from his/her employers.

To claim an exemption under Section 80GG, the taxpayer must fulfill the following criteria: 

• The taxpayer pays rent for his/her accommodation;
• The taxpayer does not receive an HRA from his/her employer;
• The taxpayer is salaried, or is self-employed or is in business;
• The taxpayer does not own any house property which is deemed as self-occupied;
• The taxpayer’s spouse or minor child does not own house property where the taxpayer resides or carries on his/her profession.

Can HRA exemption be claimed along with deduction on a home loan?

The HRA exemption allowed to taxpayers is different from the deductions which taxpayers can claim for his/her home loans. Hence, both the deductions can be claimed simultaneously by a taxpayer. 

Is having the landlord's Permanent Account Number a requirement?

In case the taxpayer is making a payment which is more than Rs. One lakh per year to his/her landlord, then it is necessary for the taxpayer to have a copy of the landlord’s PAN card. In the event, the taxpayer does not have his/her landlord’s PAN; then he/she may not receive the exemption on the HRA.

The Bottom Line

The exemption on house rent allowance provided by the income tax department is a boon to salaried workers across India. With the cost of living on the rise along with increasing rent across the country, this tax break is a welcome addition to the income tax laws of India. While claiming the HRA benefit, it is important to be mindful of the various conditions which a taxpayer must fulfill to be eligible for the benefit.

Helpful Resources: Online Income Tax Calculator