How To Save Income Tax on House Rent Allowance

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House Rent Allowance

HRA or House Rent allowance also provides for tax exemptions. The different Sections of the Income Tax Act help the salaried individuals, and the self-employed people and professionals, to make their rent expenditures cheaper, and more desirable.

Salaries of the employees of both private and public sector organizations are composed of a number of minor components as well. HRA or the House Rent Allowance is one of the sub-components of the salary. HRA can be fixed or can be derived upon through a special agreement between the employee and the employer.

As the name suggest, the House Rent Allowance is given to an employee when he or she lives in rented residential premises, and is only provided when the employee stays at a residence that he or she does not own.

HRA for Self Employed

The self-employed can also claim for deductions and HRA tax exemptions, towards the House Rent Allowance (HRA). They can claim the benefits under the Section 80 GG. This Section can also be used to claim the HRA tax exemptions by the salaried employees when they do not receive any HRA.

HRA Tax Exemption for the Salaried Individuals

The Income Tax Act Section 10-13A provides for HRA exemption of tax. The deduction will be the lowest amongst:

  • The House Rent Allowances that is given by the employer.
  • 50% of the employee salary is eligible for HRA tax exemption if he or she lives in any of the Metro cities of India. The metropolitan cities of India include Delhi, Mumbai, Calcutta and Chennai
  • In case the employee lives in any other city then 40% of the salary can be HRA exempted.
  • The actual rent that is paid by the employee for the residence each month, minus 10 % of his/her salary.

Salary here may include the basic salary, the dearness allowance, and the commissions.

When the Rent Amount Exceeds Rs 1 Lakh

In case the rent paid towards house rent is more than Rs 1 Lakh, the individual can claim HRA tax exemptions towards it. He or she will have to furnish the PAN details of the property owner, along with the rent receipts.

Tax Benefits on Both Home Loan and Rented Residence

In case the home of the employee is rented to someone else, and the person is living in a rented space, he or she can claim the benefits of HRA tax exemptions on both home loan and the rent paid. In this case, the employee will have to denote his or her income gained through the property (for which he/she took the home loan), and pay the due tax for it.

Note: In case the rented and the owned property in the same city, the deductions on both are not available for HRA tax exemptions. The employee will have to prove that his or her property is located far away from the job location, and cannot be used for the residential purposes, in order to avail the tax benefit as HRA exemption.

Documents that are required to Claim the House Rent Allowance Related Tax Exemptions

The employee will have to provide the following documents, in case he or she wishes to claim or the tax exemptions related to the House Rent Allowances.

  • If the rent paid during given financial year is greater than Rs 1 Lakh, the employee will have to provide the PAN card details and copy of the landlord/property owner in order to claim HRA tax exemption.
  • The receipts of rents paid by the employee. The details of the receipt include:
  • Date name of the landlord
  • Name of the tenant
  • PAN card details of the landlord
  • Address of the rented accommodation
  • Duration of stay
  • A revenue stamp
  • Signature of the landlord, on the revenue stamp
  • The same receipt can be used for a period of 3 months. Hence, for a year, you need at-least last 4 receipts. 
  • The photocopy/Xerox of the rent-agreement, when required

The employee can also pay the house rent to his or her father, and claim the tax exemptions related to the House Rent Allowance (HRA).

Tax Exemptions on HRA When the Employer Refuses to Provide the Deduction Benefits:-

Even if the employer refuses to provide for the tax benefits of the House Rent Allowances, the employee can claim the HRA tax exemption when he or she files the income tax returns. The exempted monetary amount can be received as the refund of the excess TDS.

Tax Exemptions on HRA When the Rent is Paid by More Than 1 Member of the Family:-

In case both husband and wife are earning, and both of them are paying the house rent, both of them can claim the tax rebate related to the HRA, in case they can both furnish the separate rent payment receipts. But for a single rent paid, any one of them can only claim the tax exemption.  

Conditions that Need to be Fulfilled for Claiming Tax Exemptions Related to House Rent Allowance:-

  • The HRA exemption under Section 80, or other section, is only provided to an employee when or she actually pays the rent to the landlord. There is no exemption for the time periods when the rent is not paid.
  • When there is a change in job location (i.e. shift from non-metro to the metro cities or vice versa), or a change in the salary, the HRA tax are calculated on the monthly basis. Hence the deductions or the HRA tax exemptions also vary for the periods of change separately.
  • Apart from a father, if the rent is paid to any other family member, HRA and the tax exceptions related to it are provided to the employee. In order to claim the deductions, it is advisable to pay the rents on a regular monthly basis and through the bank transfers only. This will help the IT department to easily deduce the expenditure.

HRA Tax Exemptions on the Rent Paid, Under the Section 80 GG

The Section 80 GG of the Income Tax Act provides for the tax exemptions, for the expenditures that are made towards the House Rent. But the HRA exemptions under this particulars section are available to the employee only when he or she has not claimed the deduction under any other section of the Income Tax (IT) Act. Self-employed professionals and the employees who do not receive the House Rent Allowance can claim the HRA tax exemptions for the expenditures that they make towards paying the house rent under this Section of 80GG

Other Conditions Related to the Section 80 GG

  • The house rent exemptions are only available to the HUF and the individuals. 
  • Both self-employed people and salaried employees can claim rent-related deductions if they do not receive any tax exemptions under the Section 10-13A
  • The HUF of which the employee is a member, the minor child, or the spouse does not enjoy the ownership of an accommodation, where the employee/self-employee person is working.
  • Those who seek tax exemptions under the Section 80 GG should not claim any tax benefits related to a self-occupied property, which they own elsewhere.
  • Those who seek deductions under the Section 80 GG should be able to furnish the self-declaration, by using the form 10-BA. In the form, the individual will have to show that he or she satisfies all the conditions.

Actual Taxation Exemption for Expenditure Made Towards Rent, Under the Section 80 GG:-

Under the Section 80 GG, the self-employed or the salaried person can claim a HRA tax exemption or the rent paid by him or her, in excess of 10% of his/her income or salary respectively. The upper ceiling is 25%, which means that rent paid in between 10% and 25% of the salary/income is only available for deduction/ HRA exemption.

Or

Rs 5000

Or

25% of the total adjusted total income, where adjusted total income means:

Gross Total Annual Income - the “long term” capital gains - the “short term” capital gains - deductions claimed under Section 80 (from the Section 80 C to the Section 80 U, except the section 80 GG itself).

Whichever of a, b, or c is less, will be exempted from taxation, by the income tax department.

An Illustration

For instance, if Mr. Sohan earns an annual capital of Rs 4 lakhs, and pays the annual rent of Rs 1.5 lakhs, he will be provided a tax exemption which will be the least of: 

Condition

Tax Exemption

1

Rs 60, 000 (@Rs 5000 Per Month, according to the HRA exemption 2016-17 rules, earlier the limit was Rs 2, 000) 

2

Rent paid i.e. 1.5 Lakhs - 10% of the total annual income, i.e. Rs 40, 000= Rs 1, 10, 000 

3

25% of the total income= Rs 1 Lakh 

 

As the least of the three is Rs 40, 000, this would be the HRA tax exemption provided to Mr. Sohan, and the 1st condition will prevail.

Date for Filing the ITR and Claiming the HRA Tax Exemption

For all those who are salaried, and who want to claim the HRA tax exemptions, among others, the last date for filing and submitting the ITR (Income Tax Returns) is July 31st of a given financial year. For the self-employed, that last date is;

  • July 31, when they do not require an Audit of their income.
  • September 30, when they require the audit to be done on the income

HRA Calculator

The free HRA calculator online is a tool that will help you to calculate your House Rent Allowance and the tax exemptions that you can claim for it.

Note that the HRA is not a right of the employees, and it is up to the employer to grant it or refuse it. Those who get free accommodations along with the job do not get any House Rent Allowance, and hence cannot claim for any HRA exemptions of tax towards it.

Decoding HRA Tax Exemption

House Rent Allowance ( HRA) is an added benefit that is offered by an employer to its employees. If you are staying in a rented house and getting House Rent Allowance as a part of your salary, you can claim for full/partial HRA exemption as per the Section 10 of IT Act. On the other hand, HRA is taxable if you are unable to provide a proof of rented accommodation.

HRA benefits are only available for a salaried person, where a self-employed person can’t claim HRA benefits. Moreover, HRA tax exemption is only applicable in case the claimant is living in a rented house. In case of rent paid that exceeds Rs. 1 lakh in a financial year, the employee needs to furnish the PAN card details of the landlord along with the HRA claim.

How to Calculate HRA?

The HRA can be calculated based on the below factors:

  • Salary
  • HRA component of salary
  • Rent paid
  • Location of your rented residence

HRA Exemption Rules & Tax Deductions

The following rules are applicable for HRA claims:

  • HRA can’t be more than 50% of your basic salary
  • The full amount cannot be claimed as the exemption is based on the least of the following:
  • Actual rent paid (-) 10% of the basic salary.
    • Actual HRA received from the employer
    • 50% of the basic salary if the tax-claimant lives in a metro city
    • You can claim for HRA benefits for home loan
  • In case you are living in your own house, you can pay rent to your parents and provide the sufficient proofs in order to claim HRA benefits. In the same scenario, you can’t pay rent o your spouse and claim HRA.
  • In case of rent exceeding Rs. 1,00,000, the PAN details of the landlord is mandatory to provide along with the HRA claim form.
  • If the landlord is an NRI, you can deduct 30% tax from the rent and declared the same.

This means the HRA tax exemption is done based on the following rules:

  • Exact HRA received
  • Exact rent paid reduced by 10% of salary
  • 50% of the basic salary if the tax-claimant is residing in a metro city
  • 40% of the basic salary if the tax-claimant is residing in a non-metro city

Since the least of the above is eligible for HRA tax exemption, you can request the employer to rearrange your salary to avail maximum tax benefit.

HRA calculation can be done annually in case the deciding factors remain constant. In case any factor changes during the respective financial year, the calculation can be done on a monthly basis.

Tax Exemption with an Example

Let’s understand the process of HRA tax exemption under with an example:

Mr Verma, employed in Mumbai, is living in a rented accommodation and pays a monthly rent of Rs. 10,000 during the fiscal year 2017-18 (the assessment year 2018-19). He receives a basic salary of Rs. 30,000 with an HRA of Rs. 15,000 PM from his employer. The HRA component that could be exempted from income tax will be-

Particulars

Amount (INR)

Amount (INR)

Actual HRA received

15,000 x 12

1,80,000

Actual rent paid

 

(Rs 10,000 x 12) – 10% of salary [(Rs 30,000 x 12) x 10%]

Rs 84,000

50% of basic salary (as he live sin Mumbai)

[(Rs 30,000 x 12) x 50%]

Rs 1,80,000

In this case, the HRA tax exemption that can be claimed by Mr Verma will be Rs 84,000, as it is the least among the aforementioned figures.

How to Claim HRA When Living With Parents?

HRA benefits can be availed even if you’re living with your parents. Let’s imagine a situation-

Rajeev works in an IT company in Bangalore. His employer provides him with the benefits of house rent allowance. Rahul lives with his parents in their house. In this case, how can Rahul use the benefits of HRA exemption? Rahul can pay the rent to his parents and claim HRA allowance. All he needs to do is to fill a rental agreement and transfer the money to his parents every month.

This way both Rahul and his parents can save taxes. His parents will need to show the proof of rent that Rahul pays while filing ITR form.

This way, you can claim HRA even if you’re staying with your parents. You can also claim HRA benefits on home loan interests as well. You can try out various HRA calculators online to know how much of your HRA is liable for taxes and how much is exempted.

FAQs on House Rent Allowance exemption:

1. How do I calculate HRA tax exemption?

Ans. The basics of calculating your HRA manually are:

  • Actual HRA received
  • Actual rent paid (–) 10% of basic salary
  • 50% of basic salary in case of residing in a metro city
  • 40% of basic salary in case of residing in a non-metro city

2. Explain HRA exemption in income tax?

Ans. HRA is an amount received from the employer as a part of one’s salary. HRA exemption in income tax can’t exceed 50% of the basic salary received from the employer and it can be availed for paying rent towards a landlord.

3. Is HRA tax-free?

Ans: HRA can be fully or partially exempted from tax. Those who earn a salary from the employers can claim for HRA benefits up to a certain limit. However, the remaining amount is liable for the tax.

4. Is rent receipt mandatory for HRA exemption?

Ans: Yes, it is mandatory in case the employee receives HRA more than Rs. 3000 per month. However, it is a good idea to furnish rent receipt even the HRA is less than Rs. 3000.

5. Is HRA included in 80C?

Ans: No, HRA doesn’t come under Section 80C. It comes under Section 10(13A), with rule 2A of IT Act.

6. Who can claim HRA exemption?

Ans. Only a salaried person living in a rented house can claim HRA tax exemption.

7. Can I pay rent to my wife and claim HRA?

Ans: No can’t. You can only pay the rent to your parents and claim HRA exemption out of it.

8. What if I own a house and wish to claim HRA?

Ans: No, you can't claim HRA if you own a house. HRA exemption can be availed only if you stay in a rented house or you pay rent to your parents in case you’re living in own house.

9. Can both the spouse claim HRA?

Ans. Yes, only if both the spouses paying rent towards the landlord. They can claim exemption separately as well by furnishing separate rent receipts.

10. What is HRA salary?

Ans. It is an additional benefit paid by the employers to their employees, as a part of the actual salary. This is counted among the various perks offered by an employer to retain the talent in an organisation.

11. What is the role of rent agreement for HRA exemption?

Ans. Yes, rent agreement is required to claim HRA exemption. Although it is not mandatory, your employer may ask for it.

12. Can I claim HRA at the time of filing tax returns?

Ans: Yes you can. The only requirement is you live in a rented accommodation and proving the valid documents at the time of claiming HRA exemption.

13. Which section does HRA comes under?

Ans: HRA tax exemption comes under Section 10(13A), with rule 2A of Income Tax Act.

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