What is House Rent Allowance and How Does It Helps in Saving Tax?

The Buyt Desk

HRA: House Rent Allowance is the allowance that a company pays to employees as compensation for the living expenditure in a city. It is part of the cost to the company but not part of basic pay.

What is HRA, and What Does It Stands For?

The HRA stands for House Rent Allowance. It is the amount that an organization pays to their employees to pay the rent of accommodation in the place of employment. This amount is eligible for tax deduction under section 10(13A) of the income tax act. However, HRA can be fully and partially taxable in certain conditions, such as the salary, the HRA received, the place of employment, and the actual rent employee pays, etc.

When You Can Claim Tax Deduction On HRA

There are three criteria for claiming the tax deduction on HRA,

• A salaried and self-employed individual can claim an HRA exemption.

• The person lives in a rented house.

• Must produce proof of rent, such as rent receipt, rent agreement, etc.

How To Calculate House Rent Allowance

HRA is an integral component of salary. Three components need to be taken into consideration to calculate it.

• The actual HRA component of the salary.

• 50% of the basic salary if the individual lives in metro cities (Delhi, Mumbai, Chennai and Kolkata). It is 40% for other cities.

• Actual rent paid less 10% of basic salary.

Scenario: A person lives in Delhi in a rented home and pays 10,000 rent. His salary break will be this way.

There is also a PF contribution of 2000 and a professional tax of 200. The tax-exempt part of HRA in this example will be the lowest of the following, taking into account his earnings in a year.

In this calculation, the lowest value is Rs 84,000. This is the amount an individual can claim for tax exemption. The remaining HRA amount the individual receives will be taxed based on his income tax slab.

How HRA Gets Taxed?

According to the HRA tax exemption rules, any employed or self-employed individual who lives on rent can claim for HRA deduction. To claim the HRA tax deduction, one has to live on rent. If any individual did not pay rent but has the HRA component in CTC, then HRA would be taxed according to his income tax slab.

In the above example, if the person does not pay rent, the Rs 84,000 would be taxed under his income tax slab.

Self-employed individuals who do not have the HRA component in their salary to show can use HRA exemption under section 80GG of ITA to claim tax exemption. This option is available to those salaried employees also who do not receive HRA from employers.

What Are the Benefits of HRA Deduction

The HRA deduction under section 10(13A) of the ITA offers multiple benefits. These are

• HRA rebate decreases taxable income.

• One can get HRA tax exemption benefit even when living with parents by producing rent proof.

• An individual with a home loan and paying EMI but lives in a rented house can also claim for HRA exemption provided the person lives in a rented house in the city of employment and owns the home at a different place. A person who owns a house in the city of employment but lives on rent has to produce a valid reason to claim an HRA exemption.

Points to Remember to Claim HRA Deduction

• Without living on rent, you can’t claim HRA tax exemption.

• The whole HRA can’t be claimed for exemption.

• For HRA calculation, Mumbai, Delhi, Chennai, and Kolkata are considered metro cities.

• You can claim HRA while living with your parents by producing rent proof.

• Rent paid to the spouse is not eligible for tax exemption.

• To claim tax exemption for rent of more than Rs 1,00,000, annually PAN detail of the landlord has to be produced.

• In case the landlord does not have PAN has to give a signed declaration.

What Documents Are Required to Claim HRA Tax Exemption

ITA states to produce certain documents to claim HRA tax exemption. These are

• Proof of rent. It can be a rental receipt, bank transfer, rent agreement, etc.

• If the rent exceeds Rs 1 Lakh annually, then PAN detail of the landlord or signed declaration form from the landlord.

• For rent paid to family members, PAN detail of the family member receiving the rent or signed declaration form.