Through this blog we shall give a detailed analysis on House Rent Allowance or HRA, rules related to HRA and HRA Exemption.
If you are a salaried employee, you might be receiving your monthly salary slips consisting of various components that form part of your Total monthly salary.
Have you ever wondered what does the small component of your salary known as “House Rent Allowance or HRA” exactly means.
Here we shall be highlighting all the aspects related to House Rent Allowance or HRA in a simple manner, that shall help you in understanding this small but very important part of your salary.You will probably get answers to all your queries regarding House Rent Allowance.
What is House Rent Allowance or HRA ?
House Rent Allowance or HRA is an allowance paid by an employer to his employees for meeting their rent expenses in relation to accommodation taken for residential purpose only.The amount of HRA is decided by the employer based on the salary of the employee and the city of residence i.e. the employee is staying in one of the metro cities or some other city.
HRA provides additional tax benefit to the employees i.e.if you are a salaried person, you can save some of your taxes if HRA forms part of your salary.
Keep reading further to know about these tax benefits…
House Rent Allowance or HRA : Important points
- HRA or House Rent Allowance is available only to salaried individuals. So, the tax benefit related to HRA can also be claimed by salaried persons only.
- Self employed professionals, businessmen etc.cannot claim the HRA exemption under Section 10(13A). But,they can claim Deduction for house rent under section 80 GG subject to certain conditions.
- HRA exemption is available if an employee stays in a rented accommodation during the period for which he is claiming exemption.
- If you stay in your own house and are not paying any rent, you are not eligible to claim the HRA Exemption.
- You must have actually incurred the rent expenditure i.e. you must have actually paid the rent.
- If rent paid during the financial year exceeds Rs.1 lakh or Rs.8333 per month, the employee has to furnish the Name, Address and PAN of the landlord.
- Claiming HRA Exemption is a good and genuine way to save some taxes for salaried employees.
For additional tips,do refer our popular blog post Tax Saving tips for salaried individuals.
House Rent Allowance/HRA Exemption : Section 10(13A)
You can claim an HRA exemption U/s 10(13A) of The Income Tax Act,1961.
The exemption will be the least of following 3 amounts:
(i) Actual HRA received from employer
(ii) Rent paid – 10% of Salary*
(iii) 50% of Basic salary (in metro cities**) or 40% of Basic Salary (in non-metro cities)
*Basic Salary here includes : Basic pay + Dearness Allowance + Commission based on turnover.
**Metro cities : Mumbai, Delhi, Kolkata and Chennai.
You should also remember that HRA is calculated on monthly basis. So,if there is any change in your Basic pay, DA, rent paid or your city of residence etc. during the year, there shall be a corresponding change in HRA exemption calculation as well.
Example : Mr. Raj works in Delhi and gets a monthly Basic salary of Rs.10000 , DA of Rs.2000 per month, HRA of Rs.4000 per month. The actual amount of monthly rent paid by Mr.Raj is Rs.5000 only.
HRA exemption will be the least of following 3 amounts:
(i) 4000*12 = 48000
(ii) (5000*12) – 10% of 144000 = 45600
(iii) 50% of 144000 i.e. 72000
Hence, Mr. Raj will get an HRA exemption of Rs.45600 from his salary income.
How to claim HRA exemption under Section 10(13A)
HRA Received XXX
Less : HRA Exemption U/S 10(13A) XXX
Taxable HRA XXX
Hence, the balance amount after reducing the HRA exemption amount forms part of taxable income and is taxed as per Individual Income tax rates.
Continuing the above example, taxable HRA of Mr.Raj shall be as follows :
HRA Received (4000*12) = Rs. 48000
Less : HRA exemption = Rs. 45600
Taxable HRA = Rs. 2400
This Rs.2400 shall form part of taxable salary of Mr.Raj.
What are the Documents or proofs required for Claiming HRA Exemption ?
- Rent receipts.
- Rent Agreement.
However, no rent receipt is required if the Rent paid is less than Rs.3000 per month.
House Rent Allowance or HRA : Common queries :
1. Can you pay rent to your parents and claim the HRA Exemption ?
Yes, you can pay rent to your parents and claim the HRA exemption provided you satisfy the following conditions :
- If the house is registered in your parents name i.e. they are the owners of the residential house where you stay.
- You pay rent to your parents and have proper supporting documents to justify the same.
- Your parents should declare the rental income as part of their Total Income in their Income Tax returns.
2. Can you pay rent to your spouse and claim HRA Exemption ?
- No, you cannot claim HRA exemption for paying rent to your wife.
3. Can you claim HRA Exemption and Home loan benefits together ?
Let us understand this by taking into consideration various scenarios :
- If your house is self occupied i.e. you are staying in your house, you are not eligible to claim HRA exemption. But, you can claim the Home loan tax benefits.
- You own a house but you stay in a rented accommodation in the same city : In this case,you can claim HRA Exemption only if you can justify that your office is far away from your own house. That is why you are staying in a rented house. So, you can claim both HRA and Home loan benefits.
- You own a house but you stay in a rented accommodation in a different city : You can claim HRA Exemption if you stay in rented house due to your job location in some other city.
4. How to claim HRA exemption in case of a shared accommodation between flatmates/friends ?
In case of a shared accommodation, it is better to claim your own share only to avoid any hassles later on.
e.g. A flat is shared by 3 friends and rent paid to the landlord by each one of them. You should consider your actual share of rent paid while calculating your HRA exemption.
5. What if you switched over to a new job during the year, how to claim the HRA exemption ?
If you have changed your job during the year, you will have to consider proportionate HRA for the months for which you were employed with both the employers. Just note that you can claim HRA exemption while taking into account Salary, DA, Rent paid and actual HRA received for a total period of 12 months only (nothing in excess).
So, if you are employed with two different employers during a particular financial year, consider salary and HRA components for the number of months you were employed with each of the employers.
Let us clarify this with help of an example :
If Mr.A received HRA of Rs.5000 from Employer 1 and he shifted his job in October 2016. He receives Rs.6000 as HRA from Employer 2 from October onwards as per his new salary package. Mr.A shall take into account Rs.5000 for first 6 months and Rs.6000 for remaining 6 months while calculating his HRA Exemption.
Your House Rent Allowance shall be shown in your Form 16 issued to you by your employer. The employer shall include the HRA exemption based on the proofs and documents as provided by you for calculating your tax liability.
So,be careful while submitting all the requisite details to avoid any excess deduction of tax from your salary.
It is always advisable to submit adequate details to the employer on time. But, don’t worry even if you miss to provide the complete details to your employer and he deducts extra tax from your salary.
You can anyways claim the same while filing your Income tax return for the relevant year. For any extra TDS on your total income, you can claim for refund while filing your Income tax return.
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So, the next time you have a look at your Salary package, Salary slip or Form 16 , you will be aware of what this House Rent Allowance signifies and how to avail the maximum benefit and save your taxes. Also, have a look at the Union Budget 2020 highlights and various new amendments. Feel free to share your valuable feedback and any queries thereupon in the comment section.