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.
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