What is House Rent Allowance, HRA Exemption And Tax Deduction

House Rent Allowance(HRA) is a component of the salary provided by employers to employees to meet the cost of renting a house or accommodation. It is a common practice in many countries, including India, where HRA is a popular component of the salary structure. HRA is beneficial for both employees and employers as it helps employees manage their housing expenses, and employers can provide a tax-free allowance instead of providing company-owned accommodation.

In this article, we will discuss what HRA is, what HRA is for self-employed and salaried individuals, how to claim HRA exemption, and how to calculate HRA exemption.

What is House Rent Allowance, HRA Exemption, Rules & Tax Deductions

What is House Rent Allowance (HRA)

House Rent Allowance (HRA) is a component of an individual’s salary that is given by employers for the rent of the employee’s residence. It is a significant tax-saving tool, as a portion of HRA is exempt from income tax under the Indian Income Tax Act, based on certain conditions.

The exemption amount is calculated based on salary, HRA received, and rent paid, aiming to reduce the taxable income of employees who live in rented accommodations.

HRA For Salaried Individuals

Under Section 10 (13A), in accordance with Rule 2A of the Income Tax Act, individuals receiving a salary have the provision to seek exemptions on their House Rent Allowance (HRA).

The amount of HRA exemption that can be claimed depends on:-

• The actual HRA received from the employer,
• Rent paid by the employee for the accommodation,
• Salary received by the employee, and
• The city where the employee resides (classified into metro and non-metro cities).

HRA For Self Employed Individuals

For non-salaried individuals, such as self-employed or professionals, there is a provision under Section 80GG of the Income Tax Act 1961 that allows for claiming a deduction on house rent paid. The maximum deduction under this section is the least of the following three amounts:

1. ₹5,000 per month (₹60,000 Annually)
2. Rent paid – 10% of the Total Income
3. 25% of the total income

However, Individuals claiming exemption under Section 80GG should not own any residential property in the location where they are claiming the deduction.

How to claim House Rent Allowance (HRA) exemption

For eligibility to claim House Rent Allowance (HRA) exemption, the following criteria must be satisfied:

• Reside in a leased accomodation.
• Have HRA included in your Cost to Company (CTC).
• Provide legitimate receipts for rent and evidence of rental payments.

The calculation for HRA deductions takes into account several elements, including the employee’s salary, the amount of rent paid, the HRA amount received, and the city where the employee lives.

How to calculate House Rent Allowance (HRA) Exemption

The HRA exemption is calculated as the minimum of the following three amounts:

1. Actual HRA received from the employer.
2. Rent Paid – 10% of Basic Salary
3. 50% of the salary for employees living in metro cities or 40% of the salary for employees living in non-metro cities.

The salary considered for calculating HRA exemption is basic salary plus dearness allowance (if it is part of the salary). Additionally, the actual rent paid should be in excess of 10% of the salary.

Practical Illustration of HRA Calculation

Example: Suppose an employee receives a monthly basic salary of ₹40,000 and an HRA component of ₹15,000 while residing in a Metro city. The employee pays a monthly rent of ₹12,000 for the accommodation. Calculate the amount of HRA that can be claimed for exemption.

Solution: In this case, the HRA exemption will be calculated as follows:

1. Actual HRA received: ₹15,000
2. Rent paid – 10% of salary
3. ₹12,000- (10% of ₹40,000 = ₹4,000) = ₹8,000
4. 50% of Salary (Metro city) = 50% of ₹40,000 = ₹20,000

The minimum of the three amounts above is ₹8,000.

Hence, the HRA exemption that can be claimed is ₹8,000 per month.

HRA Exemption Benefit when living with Parents

If you are living with your parents in their house and paying them rent, you can still claim HRA exemption, provided your parents own the house and have valid rental agreements in place. In such cases, the same rules for calculating HRA exemption mentioned earlier apply, considering the rent paid to parents instead of a third-party landlord.

Considerations for Claiming HRA Exemption Benefit while living with your parents in their House:

1. Make a transaction of the rent amount with your parents at starting of every month.
2. Always have a rent agreement between you and your parents.
3. Rent receipts for every month clearly mentioning the rent amount with your parent’s signature should be with you.
4. Submit the details of your parent’s pan card if the yearly rent amount exceeds ₹1,00,000. 

What should I Do if I do not Receive HRA?

If you’re paying rent for a place to live but don’t get HRA from your job, you can still get a tax break under Section 80GG. The conditions under which you can claim for this deduction:

• You are a salaried or a self-employed individual. 
• Neither you, your partner, your minor child, nor the Hindu Undivided Family (HUF) you are part of possess a residential property at your current location, where you live, undertake job-related tasks, or carry out your business or professional practices. 
• You did not receive any HRA allowance under Section 80GG in a year.

What are the Documentations Required for HRA Deduction?

The documentations required for House Rent Allowance(HRA) Deduction are:

1. When seeking a tax exemption for House Rent Allowance (HRA), the primary document required includes rent receipts or the lease agreement. In the absence of rent receipts, bank statements can serve as proof.
2. In situations where rent receipts are unavailable, bank statements, along with the lease agreement, must be presented.
3. To claim the HRA tax benefit, tenants must submit their rent receipts. Additionally, if the yearly rent exceeds Rs.1 lakh, the landlord’s PAN card details must also be provided.
4. In cases where the landlord does not possess a PAN card, a self-declaration form stating this fact can be submitted instead.

Can HRA Exemption and Home Loan Deduction be claimed simultaneously?

Yes, it is possible to claim HRA exemption and deduction on home loan interest simultaneously, but with certain conditions. HRA exemption can be claimed if you are staying in a rented accommodation and receiving HRA from your employer.

At the same time, you can also claim deductions on home loan interest under Section 24(b) and on principal repayment under Section 80C if you have taken a home loan for a self-occupied property. However, the HRA exemption is not available if you are living in a house for which you have taken a home loan.

To understand that claiming both HRA exemption and home loan deductions is subject to meeting the eligibility criteria and fulfilling the requirements specified by the income tax laws of the respective country or region.

How it can be claimed?

To claim an HRA exemption, the employee needs to provide the necessary documentary evidence, such as rent receipts, lease agreements, and other supporting documents, to the employer. The employer will consider the exemption while calculating the tax deducted at source (TDS) on the employee’s salary.

What are the conditions to claim both simultaneously?

To claim both HRA exemption and home loan deductions simultaneously, the individual needs to meet the following conditions:

• They should be a salaried employee receiving HRA.
• They should have taken a home loan for purchasing or constructing a house.
• The house should be self-occupied by the employee, spouse or minor child.
• The individual should not be receiving any rental income from the self-occupied property.
• The employee should be living in one city and owning a house in a different city.

What is the maximum amount that can be claimed under both sections?

The maximum amount that can be claimed under both Section 10(13A) for HRA exemption and Section 24(b) and 80C for home loan deductions varies. Under Section 10 (13A), the exemption is calculated based on the conditions mentioned earlier. For home loan deductions, the maximum deduction for interest payment under Section 24(b) is ₹2,00,000 per annum, while the maximum deduction for principal repayment under Section 80C is ₹1,50,000 per annum.

Conclusion

In conclusion, understanding the provisions and conditions for HRA exemptions is crucial for both salaried and non-salaried individuals. By utilizing these exemptions wisely, individuals can minimize their housing expenses.

However, it is always recommended to consult with a tax professional or chartered accountant for personalized advice based on individual circumstances.

What is House Rent Allowance – FAQs

What is house rent allowance in simple words?

House rent allowance, or HRA, is money that some employers give their employees to help pay for their housing rent. It’s a part of the salary that can also help you save on taxes if you’re paying rent.

Is HRA taxable?

HRA can be partially or fully exempt from taxes, depending on certain conditions like the amount of rent paid, salary, and location of the residence. Any portion of HRA not exempt under these conditions is taxable.

When is a Landlord’s PAN Required?

If your rent for the year is more than Rs.1 lakh, you need to give your landlord’s PAN card details. If they don’t have a PAN card, they must fill out a form saying so, as per the rules in Circular No. 8/2013.

What is the maximum HRA limit?

Under Section 10(13A), an employee can claim a deduction for House Rent Allowance up to the actual amount of HRA received from the employer.

Who is eligible for HRA?

HRA, or House Rent Allowance, is available to salaried individuals who receive an HRA component as part of their salary package and are living in rented accommodation. To claim HRA benefits, the individual must actually incur rent expenses.