HRA - House Rent Allowance: How to Claim, Exemption Rules, and Tax Benefits
Updated: 15 hours ago
House Rent Allowance (HRA) is a crucial part of a salaried employee’s compensation package designed to assist with rental housing costs. It provides a dual benefit: helping employees cover housing expenses and offering significant tax-saving potential. HRA is particularly relevant in high-rent regions, where living costs can create a considerable expense for employees. HRA is tax-exempt under specific conditions in India, which means a part of it can be excluded from the taxable income, thus reducing the employee's tax liability.
In this article, we will explore everything about HRA, from understanding its benefits, eligibility criteria, and calculations, to the exact process of claiming HRA.
Table of Content
Introduction to House Rent Allowance (HRA)
House Rent Allowance (HRA) is a benefit provided by employers to employees to help them cover rent expenses if they live in rented accommodation. HRA is more than just financial support; it is also a key component in reducing tax liability for those who qualify. The tax-exempt portion of HRA is calculated based on the employee’s location, salary, and actual rent paid, among other factors. However, this tax benefit is only available under specific conditions, such as the employee residing in a rented house and submitting proof of rent payments.
Understanding HRA and Its Tax Benefits
The tax benefits of HRA make it an important element in a salaried employee’s financial planning. Specifically, HRA exemption is covered under Section 10(13A) of the Income Tax Act. The basic requirement is that the employee must live in rented accommodation and pay actual rent to claim the HRA exemption. The portion of HRA exempt from taxes depends on factors including the basic salary, the city of residence (metro or non-metro), and the amount of rent paid. The calculations can be complicated but provide valuable tax benefits to employees, especially those in high-rent cities.
Under Section 10(13A), three main conditions must be met for claiming HRA:
Living in a rented accommodation: The employee should live in a rented property.
Proof of rent payment: The employee must provide documentation, such as rent receipts.
Actual rent paid exceeds 10% of basic salary: Only the portion of rent paid that exceeds 10% of the employee’s basic salary is eligible for exemption.
What is HRA in the New Tax Regime?
With the introduction of the new tax regime, taxpayers now face a choice between the old and new tax structures. The new regime offers lower tax rates across different income slabs but reduces the number of available deductions, including the HRA exemption. Thus, employees who select the new tax regime have to let go of the option to claim HRA exemptions.
This shift in the regime has made it essential for employees to carefully evaluate which tax regime is more beneficial for them based on their overall income, lifestyle, and specific deductions. Those with high HRA components and substantial rent payments may find the old tax regime more beneficial, while others with minimal or no rent expenses might prefer the lower rates of the new tax regime.
Taxability of House Rent Allowance
While HRA is technically a taxable component of salary, Section 10(13A) allows employees to claim partial or full exemption if they meet certain conditions. Specifically, the tax exemption on HRA only applies if the employee is paying rent for residential accommodation. If no rent is paid, the entire HRA component becomes taxable.
Furthermore, those opting for the new tax regime cannot avail themselves of HRA deductions, as the regime excludes most exemptions and deductions. This consideration is especially important for employees in high-rent areas who may lose a significant tax benefit if they opt for the new regime.
Eligibility for House Rent Allowance (HRA) Claims
To be eligible for HRA claims, employees must meet specific criteria set by the Income Tax Act:
Salaried Employment: Only salaried individuals who receive HRA as part of their compensation package are eligible for HRA tax benefits.
Residence in Rented Housing: To claim HRA tax exemption, the employee must live in rented housing and provide valid proof of rent payments.
Indian Residency: The exemption is available only to individuals who are residents of India.
Minimum Rent Requirement: The rent paid must exceed 10% of the employee’s basic salary to qualify for HRA exemption.
Self-employed individuals are not eligible for HRA benefits under Section 10(13A) but can avail themselves of a deduction for rent paid under Section 80GG if they meet certain conditions.
Exemptions for HRA Under Section 10(13A)
HRA tax exemptions are covered under Section 10(13A) and rule 2A, which outline guidelines on how to compute HRA exemptions:
Rent Must Exceed 10% of Basic Salary: The minimum rent threshold should exceed 10% of the basic salary.
Location-Based Exemption Limits: For metros like Mumbai, Delhi, Kolkata, and Chennai, HRA is exempt up to 50% of the basic salary. For non-metro cities, the exemption limit is 40% of the basic salary.
HRA Received from Employer: Exemptions are also subject to the actual HRA amount received by the employee.
Deduction for Renters Under Section 80GG
For individuals who do not receive HRA but still pay rent, Section 80GG offers a pathway to claim a deduction on rent. Section 80GG can be claimed if:
No HRA is included in the salary: The taxpayer must not receive any HRA as part of their salary package during the financial year.
Self-Employment Eligibility: Both salaried and self-employed individuals can claim deductions under Section 80GG, provided they meet the necessary criteria.
No Ownership in the City of Residence: The taxpayer, spouse, or minor child should not own any residential property in the city of residence.
Section 80GG deduction is capped at 25% of total income or ₹5,000 per month, whichever is less, making it a viable option for moderate rent expenses.
Calculation of HRA Exemption
The exempt portion of HRA is calculated based on three main criteria:
Actual HRA Received: The exact amount of HRA paid by the employer.
50% or 40% of Basic Salary: Employees residing in metro cities calculate HRA exemption based on 50% of their basic salary, while for non-metro residents, it’s 40%.
Rent Paid Minus 10% of Basic Salary: Only the portion of rent exceeding 10% of basic salary is allowed as an exemption.
The HRA exemption is calculated as the least of these three values.
Example Calculation:
For an employee with a monthly rent of ₹15,000, basic salary of ₹50,000, and monthly HRA of ₹20,000, the calculation would be:
Rent Paid - 10% of Basic Salary: ₹15,000 - ₹5,000 = ₹10,000
50% of Basic Salary (for metro): ₹25,000
Actual HRA received: ₹20,000
Thus, the HRA exemption would be ₹10,000, the least of these values.
Claiming HRA Deduction
Employees can claim HRA deductions while filing their tax returns. To do so, they must submit necessary documents, including:
Rent Receipts: These should be signed by the landlord and include rent amount, property address, and landlord details.
Rental Agreement: Some employers may request a copy of the rental agreement for verification.
Proof of Payment: Bank transfer details or rent payment receipts can serve as proof if required.
In the absence of Form 16, employees may declare the HRA deduction manually in their tax return, provided they meet all eligibility criteria.
HRA and Home Loan Interest Deduction
Employees owning a home in one city but living in rented accommodation in another for work may claim both HRA exemption and home loan interest deduction under Section 24(b). However, employees must justify why they live in rented housing despite owning a property elsewhere, typically for work-related reasons.
This dual benefit is valuable for those who own property but must rent due to job locations. It allows both HRA exemption and home loan interest deductions, significantly reducing tax liability.
Requirements for Landlord’s PAN
For annual rent payments exceeding ₹1 lakh, it is mandatory to provide the landlord’s PAN. If the landlord doesn’t have a PAN, they must furnish a declaration form for the tenant’s records. Furthermore, when paying rent to an NRI landlord, tenants must deduct 30% as Tax Deducted at Source (TDS).
HRA Deductions Without Receiving HRA from Employer
Employees who don’t receive HRA but live in rented accommodations can still claim a deduction under Section 80GG. The deduction conditions include:
No Ownership of Other Properties: The employee should not own any residential property in the same city.
Income Cap and Monthly Limit: Section 80GG deductions are subject to specific income limits, making it suitable for moderate rent amounts only.
How to Claim HRA While Living with Parents
Employees can claim HRA while residing with their parents by creating a formal rental agreement with them and paying rent through verifiable means, such as bank transfers. In this case, the parents must declare the rental income in their income tax returns. This approach benefits employees who prefer living with family while still claiming HRA benefits.
Consider the scenario of an individual. Let's call her Manisha, who is employed by an MNC in Bangalore. While her company provides her with HRA, she resides with her parents in their home and not in a rented space. Manisha can still leverage the HRA benefit by paying rent to her parents. To do so, she should enter a formal rental agreement with her parents and make monthly rental payments. Importantly, Manisha's parents must declare the rental income received from her in their income tax returns. If their other income falls below the basic exemption limit or is taxed at a lower slab, this approach can lead to overall tax savings for the family.
Claiming Rent Deduction under Section 80GG for Additional Properties
If employees own a property outside their work city, they may claim the 80GG deduction by declaring the other property as “deemed let out” and also declaring the rental income. Thus, qualifying for rent deduction benefits. This option is often used when employees own a property but work and rent a property in a different city.
Conclusion
HRA - House Rent Allowance is a valuable tax benefit for salaried employees in rented accommodations. By understanding HRA exemption rules, deduction methods, and eligibility, employees can significantly reduce their tax liability. Ensure accurate record-keeping, including rent receipts and landlord details, for a hassle-free claim process.
If you need expert guidance, TaxBuddy offers expert help with ITR filing, tax exemptions, and personalized tax strategies to maximize benefits.
FAQ
Q1: Who can claim HRA benefits?
Only salaried employees receiving house rent allowance as part of their pay package can claim HRA. Self-employed individuals are eligible for deductions under Section 80GG instead.
Q2: What is the eligibility for claiming HRA exemption?
To claim HRA exemption, the employee must live in rented accommodation, pay rent exceeding 10% of basic salary, and meet residency requirements.
Q3: Can HRA be claimed if the rent is paid to a family member?
No, HRA cannot be claimed if rent is paid to a family member, unless there is a valid rental agreement in place and proof of rental transactions.
Q4: What is the minimum rent requirement for HRA claims?
The minimum rent requirement is that the rent paid should exceed 10% of the basic salary.
Q5: Can both HRA and home loan interest deductions be claimed together?
Yes, employees can claim both HRA and home loan deductions if valid reasons exist for living in rented housing while owning a property elsewhere.
Q6: How to claim HRA if it’s not mentioned in Form 16?
If HRA is not in Form 16, manually add it to the tax return, provided the rent meets the eligibility criteria.
Q7: What happens if HRA isn’t claimed during employment?
If HRA isn’t claimed during employment, the employee can include it in the ITR filing.
Q8: Can I claim HRA and Section 80GG together?
No, an employee cannot claim both HRA and Section 80GG simultaneously. Section 80GG applies to self-employed individuals or those not receiving HRA.
Q9: What is the maximum limit for HRA exemption?
HRA exemption is calculated based on actual rent paid, basic salary, and location (metro or non-metro), with the least of the three being claimable.
Q10: Do I need my landlord’s PAN if rent exceeds ₹1 lakh?
Yes, providing the landlord’s PAN is mandatory if annual rent exceeds ₹1 lakh.
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