How is HRA calculated for tax exemption?
House Rent Allowance (HRA) is a crucial part of the salary structure for many employees, designed to ease the financial burden of rental expenses. Beyond just covering housing costs, it also offers a significant tax advantage under the Income Tax Act, 1961. However, the extent of this benefit depends on various factors such as salary components, rent paid, and the city of residence.
Understanding how HRA is calculated and how much of it qualifies for tax exemption can make a notable difference in reducing taxable income. While salaried individuals receiving HRA can claim exemptions under Section 10(13A), those without this allowance may still explore deductions under Section 80GG. With tax regulations evolving over time, staying updated on the latest rules ensures that individuals make the most of the tax-saving opportunities available to them.
Table of Contents:
What is House Rent Allowance (HRA) in Income Tax?
Definition of HRA as Part of the Salary Structure
House Rent Allowance (HRA) is a salary component provided by employers to help employees cover rental expenses. It is commonly included in the cost-to-company (CTC) package of salaried individuals who reside in rented accommodation.
How HRA Helps in Tax Savings Under Section 10(13A) of the Income Tax Act, 1961
HRA is partially exempt from income tax under Section 10(13A) of the Income Tax Act, 1961, reducing the taxable salary of an employee. The exemption amount depends on multiple factors, including salary structure, rent paid, and location of residence.
For an employee to claim HRA tax benefits, they must:
Be living in a rented house.
Actually pay rent and provide proof of payment (rent receipts, bank transfers, rent agreement, etc.).
Choose the old tax regime, as HRA benefits are not available under the new tax regime.
Explanation of How Employers Provide HRA to Cover Rental Expenses
Employers include HRA as part of the employee’s salary structure based on company policies and the employee’s place of residence. The HRA amount varies based on:
Basic Salary and Dearness Allowance (DA).
Whether the employee resides in a metro city (higher HRA eligibility) or a non-metro city.
The actual rent paid by the employee.
HRA is not automatically exempt from tax; it must be calculated based on income tax rules, and employees must provide necessary documentation to claim the deduction.
How to Calculate HRA for Tax Exemption?
Components of HRA Calculation for Tax Deduction
To determine the tax-exempt portion of HRA, employees must calculate the minimum amount from the following three criteria:
1. Actual HRA Received from the Employer
This is the HRA amount mentioned in the employee’s salary slip. It is the starting point for HRA exemption calculation, but it does not mean the entire HRA is tax-free.
2. HRA Exemption as a Percentage of Basic Salary + DA
50% of Basic Salary + DA for employees residing in metro cities (Delhi, Mumbai, Kolkata, Chennai).
40% of Basic Salary + DA for employees residing in non-metro cities.
3. Actual Rent Paid Minus 10% of Basic Salary + DA
This formula considers the actual rent paid by the employee and reduces it by 10% of Basic Salary + DA. The exemption is granted only on the amount exceeding this 10% threshold.
For example:
If an employee’s Basic Salary + DA = ₹50,000 per month
10% of Basic + DA = ₹5,000
If they pay ₹20,000 per month as rent, then the tax-exempt HRA is: ₹(20,000 - 5,000) = ₹15,000 per month (₹1,80,000 annually).
After calculating these three components, the HRA exemption will be the lowest of the three values.
HRA Calculation Formula as per Income Tax Rules
To determine HRA tax exemption, the following formula is applied: HRA Exempted = Minimum of the Following Three
Actual HRA received from the employer.
50% (metro) or 40% (non-metro) of Basic Salary + DA.
(Actual Rent Paid - 10% of Basic Salary + DA).
Step-by-Step Breakdown of How to Calculate HRA Tax Exemption
Identify the HRA component in the salary slip.
Determine the city type (metro or non-metro) to apply the correct percentage (50% or 40%).
Calculate the excess rent paid after deducting 10% of Basic Salary + DA.
Compare the three values and take the minimum as the tax-exempt HRA.
The remaining portion of HRA (if any) will be added to taxable income.
Key Points to Consider While Applying HRA Exemptions
HRA benefits are only available under the old tax regime. If you opt for the new tax regime, you cannot claim an HRA deduction.
HRA exemption is not a fixed percentage; it is determined by the lowest of the three criteria.
Employees must keep rent receipts and provide their landlord’s PAN if the annual rent exceeds ₹1 lakh.
If an employee stays in a house owned by their parents, they can claim HRA only if they pay rent to their parents and have a valid rent agreement.
Self-employed individuals cannot claim HRA under Section 10(13A) but may be eligible for deductions under Section 80GG.
Example: HRA Exemption Calculation as per Income Tax Act
Understanding how HRA is calculated for tax exemption is crucial for salaried individuals to optimize their tax savings. Let’s break down an example to illustrate the step-by-step calculation of HRA exemption.
Case Study: How HRA is Calculated for Tax Purposes
Consider an employee living in Mumbai (metro city) with the following salary details:
Basic Salary: ₹45,000 per month
Dearness Allowance (DA): ₹7,000 per month
HRA Received: ₹1,00,000 per year
Rent Paid: ₹25,000 per month
Breakdown of HRA Exemption Calculation
The exemption is determined by selecting the least of the following three amounts:
Actual HRA Received: ₹1,00,000 (as given in salary structure).
50% of Basic Salary + DA (since Mumbai is a metro city):
(₹45,000 + ₹7,000) × 50% × 12 = ₹3,12,000.
Actual Rent Paid Minus 10% of Basic Salary + DA:
(₹25,000 × 12) - (10% of ₹(45,000 + 7,000) × 12)
₹3,00,000 - ₹52,000 = ₹2,48,000.
Step-by-Step Illustration of HRA Calculation
Actual HRA Received: ₹1,00,000
50% of Basic + DA: ₹3,12,000
Rent Paid Minus 10% of Basic + DA: ₹2,48,000
Since the least of these three values is ₹1,00,000, the HRA exemption for this employee will be ₹1,00,000 under Section 10(13A) of the Income Tax Act.
Eligibility Criteria for HRA Tax Exemption Under Section 10(13A)
Who Can Claim HRA Tax Exemption?
HRA exemption is only available to salaried individuals who receive HRA as part of their salary. To claim this tax benefit, certain conditions must be met.
Conditions to Claim HRA Benefit
The employee must be living in rented accommodation.
If an individual stays in a self-owned house, HRA cannot be claimed.
If the annual rent paid exceeds ₹1,00,000, the landlord’s PAN is mandatory.
If the landlord does not have a PAN, the employee must obtain a self-declaration from the landlord.
HRA exemption is only available under the old tax regime.
Individuals opting for the new tax regime cannot claim HRA benefits.
Can Employees Paying Rent to Parents or Relatives Claim HRA?
Employees can claim HRA while staying in a house owned by their parents, provided:
The employee actually pays rent and has valid proof (bank transactions).
The parents declare the rent as rental income while filing their ITR.
Rent paid to a spouse is not eligible for HRA exemption, as per tax regulations.
HRA Exemption Under Section 80GG for Self-Employed & Non-Salaried Individuals
HRA exemption is generally available only to salaried employees receiving HRA from their employer. However, self-employed individuals and those who do not receive HRA can still claim tax benefits on rent paid under Section 80GG.
Who Can Claim HRA Under Section 80GG?
Self-employed professionals, freelancers, and individuals without HRA in their salary structure can claim rent deductions under Section 80GG, provided they do not own any residential property in their name or in the name of their spouse or minor children in the same city.
Difference Between HRA Under Section 10(13A) and Section 80GG
Feature | HRA (Section 10(13A)) | Section 80GG |
Eligibility | Salaried individuals receiving HRA | Self-employed or salaried individuals without HRA |
Condition | Must be living in rented accommodation | Must not own a residential house in the city of employment/business |
Maximum Deduction | Least of the three HRA calculation criteria | Least of the following: ₹5,000 per month, 25% of total income, or actual rent minus 10% of total income |
Eligibility Rules and Restrictions for Self-Employed and Freelancers
The taxpayer should not be receiving HRA in their salary.
The person or their spouse, minor child, or HUF should not own any residential property in the city of residence.
The individual must be paying rent for a house used for their personal stay.
Maximum Deduction Allowed Under Section 80GG
The maximum deduction under Section 80GG is the least of the following:
₹5,000 per month (₹60,000 annually).
25% of adjusted total income (gross income minus deductions under Sections 80C to 80U).
Actual rent paid minus 10% of total income.
For example, if an individual earns ₹8,00,000 annually and pays ₹1,20,000 in rent, the eligible deduction under Section 80GG would be:
25% of ₹8,00,000 = ₹2,00,000
₹5,000 × 12 = ₹60,000
₹1,20,000 - 10% of ₹8,00,000 = ₹40,000
Since the lowest value among these is ₹40,000, that would be the eligible deduction under Section 80GG.
HRA Exemption Under Section 80GG for Self-Employed & Non-Salaried Individuals
House Rent Allowance (HRA) is primarily a benefit available to salaried employees receiving HRA as part of their salary package. However, self-employed individuals and those without HRA can still claim a tax deduction for rent paid under Section 80GG of the Income Tax Act, 1961. This section ensures that individuals paying rent but not receiving HRA still get some tax relief.
Who can claim HRA under Section 80GG?
To be eligible for an HRA deduction under Section 80GG, an individual must meet the following conditions:
Must be self-employed or a salaried individual who does not receive HRA as part of their salary.
Must be paying rent for residential accommodation.
Cannot own any residential property at the place of employment, business, or self-employment.
If the individual owns a residential property in another location, they cannot claim benefits on that property while claiming Section 80GG.
Must file a declaration (Form 10BA) confirming that no HRA exemption has been claimed.
Difference between HRA under Section 10(13A) and 80GG
Criteria | HRA (Section 10(13A)) | Section 80GG |
Applicable to | Salaried individuals receiving HRA | Self-employed or salaried individuals without HRA |
Maximum deduction | Least of three conditions (Actual HRA, 50%/40% of Basic + DA, Rent Paid - 10% of Basic + DA) | Least of three conditions (₹5,000 per month, 25% of Total Income, Rent Paid - 10% of Adjusted Income) |
Requirement for landlord’s PAN | Required if rent > ₹1 lakh per year | Not mandatory |
Can own property elsewhere? | Yes | No property ownership at work location |
Eligibility rules and restrictions for self-employed and freelancers
Only individuals paying rent for a residential house can claim this benefit.
The deduction is not available if the taxpayer or their spouse owns a self-occupied house in the city of employment.
The taxpayer must submit Form 10BA while filing Income Tax Returns to confirm compliance with the conditions.
Maximum deduction allowed under Section 80GG
The maximum deduction available under Section 80GG is the least of the following:
₹5,000 per month (₹60,000 per year).
25% of adjusted total income (total income minus long-term capital gains, short-term capital gains under Section 111A, deductions under Sections 80C to 80U, and income under Section 115A).
Actual rent paid minus 10% of total income.
New Tax Regime vs. Old Tax Regime: Is HRA Exemption Allowed?
With the introduction of the new tax regime under Section 115BAC, taxpayers now have the option to choose between the old tax regime (which includes deductions and exemptions) and the new tax regime (which offers lower tax rates but no exemptions). HRA is one of the many deductions affected by this change.
Can you claim HRA deduction under the new tax regime?
No, HRA exemption is not available under the new tax regime. This means that individuals opting for the lower tax rates in the new regime will have to forgo HRA tax benefits.
Why HRA exemption is only available under the old tax regime
The old tax regime allows various deductions and exemptions, including:
HRA exemption under Section 10(13A)
Section 80GG deduction for self-employed individuals
Deductions under Section 80C, 80D, 80E, and others
The new tax regime has simplified tax slabs with lower rates but eliminates most exemptions, including HRA.
Pros and cons of opting for the new tax regime vs. old tax regime
Factor | Old Tax Regime | New Tax Regime |
HRA Exemption | Available under Section 10(13A) | Not available |
Tax Rates | Higher | Lower |
Deductions Allowed | Yes (HRA, 80C, 80D, etc.) | No deductions/exemptions |
Best for | Individuals with high deductions (HRA, 80C, home loan, etc.) | Individuals with minimal deductions |
Conclusion: If you pay high rent and claim HRA deductions, the old tax regime is more beneficial. However, if you have fewer deductions, you may save more under the new tax regime.
Key Documents Required to Claim HRA Tax Benefit
To successfully claim HRA exemption, individuals must maintain the following documents:
Mandatory documents for HRA exemption
Rent agreement and rent receipts
A valid rental agreement with the landlord.
Monthly or annual rent receipts signed by the landlord.
PAN of the landlord (if rent exceeds ₹1 lakh per year)
As per Income Tax rules, if your annual rent is ₹1,00,000 or more, you must submit the landlord’s PAN while claiming HRA.
If the landlord does not have a PAN, a declaration must be provided by the landlord.
Bank transaction proofs of rent payment
Bank statements or UPI payment records confirming rent payments.
Cash payments may not be accepted as proof.
Common mistakes taxpayers make while claiming HRA in ITR filing
Not submitting rent receipts: Many employees fail to provide proper receipts, leading to rejection of HRA claims.
Providing fake rent receipts: IT department scrutinizes suspicious rent claims, especially if there is no actual rental agreement.
Incorrect landlord details: If the PAN of the landlord is incorrect or missing, the claim may be denied.
Claiming HRA while owning a house in the same city: If the taxpayer owns a home in the same location and still claims HRA, it may trigger an IT notice.
Latest Updates on HRA Exemption in 2024
HRA exemptions are subject to changes based on the Union Budget and tax reforms. Here are some key updates:
Changes in HRA tax rules as per Union Budget 2024
No changes have been announced in HRA exemption limits for salaried employees.
The old tax regime remains unchanged, meaning HRA exemptions are still available.
Impact of new tax policies on HRA deduction
Since the new tax regime does not allow HRA deductions, many taxpayers are opting to stick to the old tax regime.
Companies are restructuring salary packages to make up for the lack of HRA exemption.
Any expected modifications to HRA exemption laws in future tax reforms
There have been discussions on increasing HRA exemption limits for metro cities due to rising rental costs.
Future budgets may introduce additional relief for tenants, especially those with low income or no formal salary structure.
Conclusion
HRA exemption helps salaried individuals reduce taxable income under Section 10(13A), with the lowest of three criteria qualifying for deduction. Those without HRA can claim relief under Section 80GG, but only under the old tax regime.
Proper documentation such as: rent receipts, agreements, and landlord’s PAN (if applicable), is key to hassle-free claims. Using an HRA calculator ensures accuracy in exemption. Staying updated on tax rules helps optimize benefits and avoid compliance issues.
FAQs
Q1. What is the meaning of House Rent Allowance (HRA) in salary?
House Rent Allowance (HRA) is a salary component provided by employers to employees to help them cover rental expenses. It is partially or fully exempt from income tax under Section 10(13A) of the Income Tax Act, 1961, provided certain conditions are met. HRA benefits are available only to salaried employees who receive HRA as part of their salary structure.
Q2. How is HRA exemption calculated under Section 10(13A) of the Income Tax Act?
HRA exemption is calculated as the least of the following three amounts:
Actual HRA received from the employer.
50% of Basic Salary + DA (for metro cities) or 40% of Basic Salary + DA (for non-metro cities).
Actual rent paid minus 10% of Basic Salary + DA.
The lowest of these three values is the HRA amount that can be claimed as a tax exemption.
Q3. Can I claim HRA tax exemption if I live in my parent's house and pay rent?
Yes, you can claim HRA exemption if you pay rent to your parents, but you must provide proof of actual rent payments, such as bank transactions or receipts. However, your parents must declare this rental income in their income tax returns.
Q4. How much HRA exemption can I get if I live in a metro city vs. a non-metro city?
If you live in a metro city (Delhi, Mumbai, Kolkata, Chennai), you can claim up to 50% of your Basic Salary + DA as an exemption.
If you live in a non-metro city, you can claim up to 40% of your Basic Salary + DA.
The actual exemption depends on the lowest amount among the three calculation criteria.
Q5. Is it necessary to provide rent receipts to claim HRA tax deduction?
Yes, if your annual rent exceeds ₹1 lakh, you must submit rent receipts as proof to your employer. Some companies also require a rent agreement as supporting documentation. For smaller rental amounts, employers may allow HRA claims without receipts, but it is always advisable to keep them for verification.
Q6. What happens if my rent is more than ₹1 lakh per year?
If your total annual rent exceeds ₹1,00,000, you must submit your landlord’s PAN (Permanent Account Number) along with rent receipts when claiming HRA exemption. If your landlord does not have a PAN, they must provide a written declaration stating the same.
Q7. Can I claim both HRA and home loan tax benefits simultaneously?
Yes, you can claim both HRA exemption and home loan tax benefits under Section 80C and Section 24(b) if:
You are paying rent for your residence while also repaying a home loan for another property.
The home loan property is under construction, rented out, or located in another city.
If you are staying in your own house, HRA exemption is not applicable.
Q8. Is HRA deduction allowed under the new tax regime?
No, under the new tax regime (introduced in FY 2020-21), HRA exemption is not available. If you opt for the new regime, you cannot claim any deductions under Section 10(13A), even if you pay rent. HRA exemption is only allowed if you choose the old tax regime.
Q9. How does Section 80GG help people who do not receive HRA?
If you are self-employed or a salaried individual who does not receive HRA, you can claim a deduction under Section 80GG for rent paid. The deduction is the lowest of the following:
₹5,000 per month (₹60,000 annually).
25% of total adjusted gross income.
Actual rent paid minus 10% of total income.
This benefit is only available if you do not own a house in the city where you work.
Q10. Can both spouses claim HRA exemption if they are paying rent jointly?
Yes, both spouses can split the rent and claim HRA exemption individually, provided they contribute to the rent payment and have supporting proofs such as bank transactions or a rental agreement with both names.
Q11. What should I do if my landlord refuses to provide a PAN number?
If your annual rent exceeds ₹1 lakh, you must provide your landlord’s PAN for tax filing. If your landlord does not have a PAN, they must submit a self-declaration stating they do not hold a PAN. Without this, your HRA exemption claim might be rejected by your employer or the Income Tax Department.
Q12. Can HRA be claimed for multiple rented houses during the financial year?
Yes, you can claim HRA exemption for multiple rented houses in a financial year if you shifted residences. However, you must provide rent receipts for each rental period, and the exemption will be calculated accordingly based on your salary for each duration.
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