House Rent Allowance

What is House Rent Allowance or HRA?

HRA, or the House Rent Allowance, is one of the sub-components of the employee's salary for which deductions are fully or partially taxable under Section 10(13A) of the Income Tax Act. The HRA calculation depends on the following factors:

• The salary of the employee

• The actual rent paid by the employee

• The House Rent Allowance receivable by the employee

• The place where the employee is residing

• The place where the company or employer is situated

The different Sections of the Income Tax Act help salaried individuals, self-employed people, and professionals to make their rent expenditures cheaper and more desirable. Salaries of private and public sector employees are also composed of several minor components. HRA can be fixed or derived through a special agreement between the employee and the employer.

HRA for Self Employed

The self-employed can also claim deductions and HRA tax exemptions towards the House Rent Allowance (HRA). They can claim the benefits under 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 for Salaried Individuals

As per the Income Tax Act, salaried individuals are eligible for HRA exemptions under Section 10 (13A) per rule number 2A of the Income Tax Act. House Rent Allowance is an important part of an individual's salary and hence should be claimed as per the company's rules. 

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 among the following:

• The House Rent Allowances that the employer gives.

• 50% of the employee's salary is eligible for HRA tax exemption if they live 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 paid by the employee for the residence each month Minus (-) 10% of their salary.

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

Tax Benefits on Both Home Loan and Rented Residence

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

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

Documents Required to Claim the House Rent Allowance Related Tax Exemptions

The employee must provide the following documents if they wish to claim the tax exemptions related to the House Rent Allowances.

• If the rent paid during the given financial year exceeds Rs. 1 Lakh, the employee must provide the PAN card details and a copy of the landlord/property owner to claim HRA tax exemption.

• The receipts of rent paid by the employee. The details of the receipt include the following:

  • Date and 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 3 months. Hence, you need at least the last 4 receipts for a year. 

  • The photocopy/Xerox of the rent agreement, when required

The employee can also pay the house rent of their father and claim the tax exemptions related to the House Rent Allowance (HRA).

Eligibility Criteria to Claim Tax Deductions On HRA

Tax deductions on HRA under Section 10 (13A) of the Income Tax Act can be claimed by fulfilling the following criteria:

• The individual willing to claim HRA deductions must be either self-employed or salaried.

• The current residence needs to be rented. HRA Calculations require a rented house and not the individual's personal residence.

• A House rent receipt or any other house document proof is required to claim the HRA deductions.

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

Section 80 GG of the Income Tax Act provides tax exemptions for the expenditures made towards the House Rent. But the HRA exemptions under this particulars section are available to the employee only when they have not claimed the deduction under any other section of the Income Tax (IT) Act. Self-employed professionals and employees who do not receive the House Rent Allowance can claim the HRA tax exemptions for their expenditures 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 and salaried employees can claim rent-related deductions if they do not receive any tax exemptions under 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-employed person is working.

• Those seeking tax exemptions under Section 80 GG should not claim any tax benefits related to a self-occupied property they own elsewhere.

• Those seeking deductions under Section 80 GG should be able to furnish the self-declaration using form 10-BA. In the form, the individual must show that they satisfy all the conditions.

Date for Filing the ITR and Claiming the HRA Tax Exemption

For all those who are salaried individuals who want to claim the HRA tax exemptions, the last date for ITR filing and submitting the ITR (Income Tax Returns) is July 31 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

Under Section 80 GG, the self-employed or the salaried person can claim an HRA tax exemption or the rent paid in excess of 10% of their income or salary. To claim deductions under Section 80GG, the lowest of the following needs to be considered:

Rs. 5,000 per month

Or

25% of the total adjusted total income

Or

Actual rent, that is, 10% of adjusted total income, where adjusted total income means:

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

Whichever of the conditions mentioned above 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 the following:

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.

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 any HRA exemptions of tax towards it.

How to make HRA Calculations?

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 Minus (-) 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 HRA benefits for a home loan

• If you live in your own house, you can pay rent to your parents and provide sufficient proof 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 are mandatory to provide along with the HRA claim form.

• If the landlord is an NRI, you can deduct 30% tax from the rent and declare the same.

The HRA tax exemption is done based on the following rules:

• Exact HRA received

• The exact rent paid Minus (-) 10% of the salary

• 50% of the basic salary if the tax Minus (-) claimant is residing in a metro city

• 40% of the basic salary if the tax Minus (-) claimant is residing in a non-metro city

Since the least of the above is eligible for HRA tax exemption, you can request that the employer rearrange your salary to avail of 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 with an example:

Mr. Verma, employed in Mumbai, lives in 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-

In this case, the HRA tax exemption that Mr. Verma can claim will be Rs. 84,000, which is the least among the abovementioned 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 a house rent allowance, but he lives with his parents in their house. In this case, how can Rahul use the benefits of the HRA exemption? Rahul can pay the rent to his parents and claim an HRA allowance. All he needs to do is to fill out a rental agreement and transfer the money to his parents every month.

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

This way, you can claim HRA even if you stay 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 your HRA is liable for taxes and how much is exempted.