House Rent Allowance (HRA) – Calculation, Exemption Rules and Tax Deductions under Income Tax Act

 

House Rent Allowance (HRA) – Calculation, Exemption Rules and Tax Deductions under Income Tax Act

A complete guide on HRA exemption and tax saving

Salaried individuals, who live in rented premises, can claim the House Rent Allowance (HRA) to lower their taxes. 

This allowance is for expenses on rented accommodation. If you live in a self-owned accommodation, this allowance is fully taxable.

Please note that the tax exemption of house rent allowance is not available if you choose the new tax regime from FY 2020-21 (AY 2021-22)

What is HRA (House Rent Allowance)?

HRA is the house rent allowance in income tax. It means the salary component received towards the rent payment and is allowed as a deduction from taxable salary under Section 10(13A).

How is Tax Exemption From HRA Calculated?

The deduction available is the least of the following amounts:

·        Actual HRA received

·        50% of [basic salary + DA] for those living in metro cities or 40% of [basic salary + DA] for those living in non-metros

·        Actual rent paid should be less than 10% of [basic salary + DA]

 

Logic behind above limits

1.     Actual HRA – Exemption cannot exceed the actual benefit

2.     50%/40% of Salary – Govt consider it unreasonable if more than 40%/50% of salary is paid in HRA (this is pure tax planning). And if an individual is spending more than 50% on Rent, then what will go towards Education, savings and other daily needs.

3.     Rent minus 10% of Salary – 10% of salary towards rent is very minimum do not require any benefit as per Govt approach. And if you are paying higher rents then Govt is allowing Tax exemption.

Example

Mr Rahul, employed in New Delhi, has taken up an accommodation on rent for which he pays Rs 16,000 per month during the Financial Year (FY) 2020-21. He receives a basic salary of Rs 30,000 monthly and DA of Rs 2,000, which forms a part of the salary. He also gets an HRA of Rs 1 lakh from his employer during the year.

Let us understand the HRA component that would be exempt from income tax during FY 2020-21. As per the given data, calculate the following:

·        HRA received – Rs 1 lakh

·        50% of basic salary and DA – Rs 1,92,000 (50%*(Rs 30,000+Rs 2,000)*12 months)

·        Rent paid minus 10% of salary- Rs 1,53,600

Therefore, the entire HRA received from the employer is exempt from income tax in the above example.

 

 

Can I Claim HRA and Deduction on Home Loan Interest?

Yes, you can claim HRA exemption as it has no restriction on your home loan interest deduction. Both can be claimed. 

When Do You Need a Landlord’s PAN?

If you have taken a house on rent and are making a payment of over Rs 1 lakh annually – remember to provide the landlord’s PAN. Else, you may lose out on the HRA exemption.

Landlords without a PAN must be willing to give you a declaration as per circular No. 8/2013 dated 10 October 2013. Tenants paying rent to NRI landlords must remember to deduct TDS of 30% before making the payment towards rent.

What If I Don’t Receive an HRA?

If you pay rent for living in a residential accommodation but do not receive an HRA from your employer, you can still claim the deduction under Section 80GG. Conditions that must be fulfilled to claim this deduction:

1.     You are self-employed or salaried

2.     You have not received HRA at any time during the year for which you are claiming 80GG

3.     You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession.

If you own any residential property other than the place mentioned above, you should not claim the benefit of that property as self-occupied. The other property would be deemed to be let out to claim the 80GG deduction.

How to Claim HRA When Living With Parents?

Let’s understand this with an example.

Gargi works in an MNC in Bangalore. Though her company provides her with HRA, she lives with her parents in their house and not in rented accommodation. How can she make use of this allowance?

Gargi can pay rent to her parents and claim the allowance provided. She has to enter into a rental agreement with her parents and transfer money to them every month. This way, Gargi can make a nice gesture to her parents while saving on taxes. Also, Gargi’s parents need to report the rent she paid as income in their ITR. If their other income is below the basic exemption limit or taxable at a lower tax slab, they can save tax on the family income.

How to Claim Deduction Under Section 80GG?

The least  of the will be considered as the deduction under this section:

·        Rs 5,000 per month;

·        25% of adjusted total income*;

·        Actual rent should be less than 10% of adjusted total income*

*Adjusted total income means total income minus long-term capital gain, short-term capital gain under Section 111A, income under Section 115A or 115D, and deductions 80C to 80U (except deduction under Section 80GG).

FAQ’s

How can I claim HRA exemption?

You can claim HRA exemption by submitting proofs of rent receipts to your employer. Alternatively, you can claim the HRA exemption yourself while filing your income tax return.

I am a self-employed individual. Can I claim HRA exemption?

A self-employed individual cannot claim HRA exemption. Only a salaried individual with an HRA component in their salary package can claim HRA exemption.

What is the tax liability in case my entire HRA is not tax-exempt?

The employer deducts TDS at the applicable rates on balance HRA, which is not tax-exempt.

Who can claim HRA exemption?

Salaried employees who receive house rent allowance as a part of salary and pay rent can claim HRA exemption to reduce their taxable salary wholly or partially.

What are HRA and DA?

Dearness allowance is a component of salary towards adjustment for living costs paid generally to government employees, public sector employees, and pensioners. Dearness allowance is calculated as a percentage of basic salary to cover the impact of inflation.

HRA is a component of salary paid by big employers towards rent payment by the employee. HRA exemption is allowed least of the below :

·        Actual HRA received by the employee

·        40% of salary for a non-metro city or 50% of salary if the rented property is in metro cities like Mumbai, New Delhi, Kolkata, and Chennai

·        Actual rent paid should be less than 10% of salary.

For the calculation above, the salary would include basic, dearness allowance and fixed percentage of commission.

How to claim HRA if not mentioned in Form 16?

If HRA is not mentioned in Form 16, that means your employer has not provided a separate component of HRA. HRA u/s 10(13A) can be claimed when the employer gives a separate component towards HRA. In the absence of it, you can claim for rent paid under Section 80GG.

How to submit HRA proof for ITR?

Documents like rent receipts and rental agreements must be submitted to the employer to claim a house rent allowance deduction. If the payment of rent is more than Rs 1 lakh per annum, then the PAN of the house owner must be submitted. Based on these proofs, employers will provide a deduction for HRA in Form 16.

How much HRA can be claimed without proof?

The employer mandatorily requires rent receipts as proof for claiming house rent allowance deduction.

What happens if HRA is not claimed?

If you missed submitting rent receipts and rental agreements to your employer at the time of proof submission, you could claim the HRA deduction while filing ITR. If you miss claiming the HRA while filing a return, you can file a revised return to correct the error before the end of the assessment year.

What is the maximum limit for HRA?

According to Section 10(13A), an employee can claim an HRA deduction maximum up to the actual HRA component received from the employer.

Can I claim both 80GG and HRA?

No, individuals paying rent but not receiving house rent allowance can claim deduction under Section 80GG. Also, the individual, spouse or children should not own a house property in the place of employment for claiming this deduction.