Everything about HOUSE RENT ALLOWANCE (HRA) in India

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House Rent Allowance (HRA) is the allowance given by an employer to an employee considered as the optimum tax saving instrument. HRA is given to meet the cost of a rented house occupied by the employee for his living. The Income Tax Act permits for deduction in respect of the HRA paid to employees. The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. 

Everything about HOUSE RENT ALLOWANCE (HRA) in India

 

1. HRA Exemption

Any special allowance or grant precisely granted to an employee by his employer to encounter expenses actually incurred on imbursement of rent in respect of residential accommodation occupied by the assessee, is exempt to the extent of least of the following:

(a) Actual HRA acknowledged.

(b) 40% (non – metro city) or 50% (metro city) of salary.

(c) Rent paid in excess of 10% of salary.

Salary here covers Basic salary and Dearness allowances.

Cities Like Delhi, Mumbai, Chennai and Kolkata sets up Metro. All cities except these are non-Metro. So if an individual resides in cities like Gurgaon, Faridabad, Bangalore, Hyderabad, etc. It would be called as Non metro and only 40% deduction will be allowed.

 

2. Who can avail HRA benefits?

All employee in India is eligible to claim HRA exemption if below mentioned conditions are met:

(a) Residing in Rented Accommodation by the employee.

(b) Employee is paying Rent for the house.

(c) HRA should be listed as a part of salary package in the beginning.

(d) Employee should not be co-owner of the House.

 

3. For those who don’t get HRA

An assessee who possess the following conditions can’t be entitled for HRA tax exemption:

1. He lives in an employer-provided accommodation.

2. He is self-employed businessman or professional [However, they can claim benefits on the house rent expenses incurred under section 80GG but is subject to certain conditions]

3. He lives in his own house.

4. He owns a house in the same city. However, if he can prove that his own house is too far from his workplace or he can’t live there because of the family problem, he can claim tax exemption.

 

LET’S UNDERSTAND HRA WITH AN ILLUSTRATION:

Example: Mr. Aman resides in Kolkata earning a basic salary of Rs. 40,000 per month. The HRA element of his salary is Rs. 20,000 but the real rent paid by him is Rs. 10,000. What is the exemption that Mr. Aman is supposed to get?

Solution: First let us look at the factors affecting HRA calculation. This will guide us to the answer consequently clearing our concepts. 

    a. Actual HRA received is (Rs. 20,000 x 12) = Rs. 2,40,000 

    b. Actual rent paid (Rs. 10,000 x 12) – 10% of salary [(Rs. 40,000 x 12) x 10%] = Rs. 72,000 

    c. 50% of basic salary [(Rs. 40,000 x 12) x 50%] = Rs. 2,40,000 

Thus, In the case of Aman, it is evident that the HRA amount which will be exempt from tax will be Rs. 72,000 because this is the  least amount of the three scenarios.

 

SPECIAL CONDITIONS FOR HRA EXEMPTION?

Limitations for the determinations of section 10(13A):

The amount which is not to be involved in the total income of an assesse in respect of the special allowance mentioned to in clause (13A) of section 10 shall be:

(a) The actual amount of such allowance received by the assesse in respect of the relevant period; or

(b) The amount by which the expenditure actually incurred by the assesse in payment of rent in respect of residential accommodation occupied by him exceeds one-tenth of the amount of salary due to the assesse in respect of the relevant period; or

(c) An amount equal to:

(i) Where accommodation is situated at Mumbai, Calcutta, Delhi or Madras, 50% of the amount of salary due to the assesse in respect of the relevant period; and

(ii) Where such accommodation is situated at any other place, 40% of the amount of salary due to the assesse in respect of the relevant period, whichever is the least.

 

4. How to make HRA claim?

No documentary proof is required if HRA claim is up to Rs 3000 / Month. If the amount exceeds this limit this will lead to a case in which you will be required to present the following documents as evidence of payment.

  • Rent receipts: Rent receipt format for HRA tax exemption includes one rupee rev­enue stamp affixed on a complete filled in receipt with complete details of rented house and landlord like address of rented house, name of the landlord, rental amount etc. with the sig­nature of landlord receiving the rent.
  • Rental agreement in some cases.

If the rent paid is in excess of Rs.8333/month i.e. Rs. 1,00,000 per annum then PAN Details of Landlord is mandatory for claiming exemption.

 

5. How to avail tax benefits on home loan and HRA at same time?

If the owned property and the rented property of an individual/assessee are in the same city, then tax exemption on both cannot be claimed. However, if he can prove that his own house is too far from his workplace or he can’t live there because of the family problem, he can claim tax both HRA as well as housing loan.

However, Tax benefits on HRA are relevant as long as you are giving rent for your housing. You can gain tax benefits on your home loan as well as HRA benefits in case your own home is rented out and you yourself are staying in a rented place. However, in such a case you need to disclose your rental income or income from property from which suitable tax will be deducted by the government.

In another way we can also say that yes you can claim both tax exemptions together. If you are a home owner paying back home loan but living in a rented accommodation then you can get tax benefits for both cases.

 

IMPORTANT FAQS OF HRA:

 

1. An individual is living with his parents and home is in his mother’s name. How can he get tax benefits? Is there any legal way?

You can show that you are living in your parents’ house as the tenant and pay them the monthly rental. In this way you can get the HRA benefit.

2. An individual has paid rent to his wife/Father. Can he/she claim HRA exemption?

If this is actual payment then yes you can claim rent exemption even if the rent is being paid to your family members. But remember House must be on their name or he / she must be authorized to receive rent on the property. Though the above point have no relation with HRA exemption but tax planning should be done carefully and remain with in limit.

3. What can an individual do if his landlord does not have PAN? How do the individual claim tax deduction on HRA?

It is compulsory to get PAN details of your employer to claim tax benefits on HRA. But, if your landlord does not have a PAN then you must get a declaration from him affirming the same. It is healthier that you get the details (PAN or declaration) before you take place on rent in order to avoid difficulties at the time of filing income return.

4. Can HRA and housing loan both be ask for if an individual has purchased house in one city and he stays in rented house in some other city?

Yes, it’s possible.

5. Whether all  twelve months rent receipts needed to be submitted for HRA?

Not needed. You can submit rent receipts for 2 months or at the most 3 months.

 

FINAL POINTS TO BE NOTED WHILE CALCULATING YOUR HRA:

1. Computation table of HRA.

ParticularsRs.Rs.
Amount Received during   the financial year for HRA xxx
Less : Exemption u/s 10(13A)   Least of the followings :  
           (a)  Actual Amount Received.xxx 
           (b)  50%(For Metro cities) / 40% of Salary (for other places)xxx 
           (c)  Rent paid less 10% of salaryxxxxxx
  (xxx)

 2. How to claim Section 80GG deduction?

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

  • 25% of total income
  • Rs 2,000 per month
  • Actual Rent less 10% of Income 
    (In both the above cases, income to exclude long term capital gain, short term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U. Also income is before making deduction under section 80GG).

If you have any doubts regarding HRA, kindly leave your comments. We would try our level best to address those.

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