HRA in Salary – What is It? Calculations & Formula

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If you have ever checked the salary breakdown section on your pay slip, you must have noticed House Rent Allowance (HRA). But what is HRA and how does it benefit you? Read on to understand everything you need to know about this allowance.

What is HRA?

HRA is an essential part of the salary paid by employers to their employees. The company pays the amount as an allowance for your annual house rent, and it comes with tax benefits. The employers decide the HRA amount depending on your city of residence and salary.

The tax benefit of HRA comes under Section 10(13A) of the Income Tax Act, 1961, but it pertains to specific provisions. Moreover, you can enjoy the HRA benefits only if you live in a rented house. People living in their own homes are not eligible to claim HRA tax exemption.

Eligibility criteria to claim HRA tax deduction

Before you can claim HRA deduction, make sure if you are eligible. Here is a list of criteria you must meet:

You must be a salaried individual
You should be living in a rented house
Your salary slip should include the HRA section

Benefits of HRA

The key benefit of HRA is that it reduces your taxable income. Thus, you have a lower tax liability when your company pays the allowance. Additionally, it relieves the financial burden as the amount covers your entire or at least a part of the rent.

HRA exemption rules

If you live in your own house, you cannot claim the exemption.
You must submit the rent receipts as proof to avail of the tax exemption.
You can get the HRA exemption if you are paying rent to your parents as long as you submit the relevant receipts.
You are not eligible to receive the tax benefit by paying rent to your spouse as the Income Tax Act, 1961 does not allow it.
If you pay over INR 1 lakh as annual rent, it is mandatory to submit the permanent account number (PAN) card details of your landlord.
If you live in a metro city (Delhi, Kolkata, Mumbai, or Chennai), you are eligible to get 50% (Basic salary + Dearness Allowance) of your basic salary as HRA, while it is 40% (Basic salary + Dearness Allowance) for non-metro cities.

How to calculate HRA?

HRA exemption = Minimum of:

Actual HRA received OR
50% or 40% of (Basic salary + Dearness Allowance) OR
Actual rent paid – 10% of (Basic salary + Dearness Allowance)

Example:

If you live in Delhi (a metro city), your Basic salary is ₹30,000, your Dearness Allowance is ₹10,000, your actual HRA received is ₹20,000, and your actual rent paid is ₹25,000, then your HRA exemption would be:

Option 1: Actual HRA received = ₹20,000
Option 2: 50% of (Basic salary + Dearness Allowance) = 50% of (30,000 + 10,000) = ₹20,000
Option 3: Actual rent paid – 10% of (Basic salary + Dearness Allowance) = 25,000 – 10% of (30,000 + 10,000) = ₹22,000
Since the least amount is ₹20,000, your HRA exemption would be ₹20,000.

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Documents required for HRA exemption

1. Rent receipts, which include the below details:

Landlord’s name
Your name
Date
Address of the rented property
Duration of stay
Revenue stamp with the landlord’s signature

2. The landlord’s PAN details and a copy of the PAN card if your annual rent exceeds INR 1 lakh

When do you need the landlord’s PAN card?

If you are currently paying more than INR 1 lakh in rent per year, you must provide your landlord’s PAN details to get the HRA tax deduction. Failing to do so will result in the loss of the tax benefit.

However, if your landlord does not have a PAN card, ask them to provide you with a declaration as per circular No. 8/2013 dated 10th October 2013. Additionally, if you are paying the rent to a Non-resident Indian (NRI) landlord, you need to deduct 30% tax deducted at source (TDS) while making the payment.

How to claim tax benefits on both HRA and home loan?

The HRA rules only allow you the tax exemption if you are currently living in rented accommodation. But what happens if you are staying in a rented place and have also rented out your own property? The income tax regulations allow you to get tax benefits on both HRA and home loans. In this scenario, you must disclose your income from rent and pay the required taxes to avail of the tax benefits.

But you cannot claim benefits on both HRA and home loans if rented and owned properties are in the same city under normal circumstances. The only way you can still claim both tax exemptions is if you can prove that you had to rent accommodation because your owned home is significantly far from the workplace.

Understanding the Basics:

HRA (House Rent Allowance): This is a tax-free component of your salary if you live in rented accommodation.
Home Loan Interest: You can claim a deduction for the interest paid on your home loan.

Claiming Both:

HRA Exemption:
- Conditions: You must be living in rented accommodation, receiving HRA from your employer, and paying rent.
- Calculation: The exemption is the least of:
  - Actual HRA received
  - 50% of (Basic Salary + Dearness Allowance) (for metro cities)
  - 40% of (Basic Salary + Dearness Allowance) (for non-metro cities)
  - Actual rent paid – 10% of (Basic Salary + Dearness Allowance)
Home Loan Interest Deduction:
- Section 24: You can claim a deduction of up to ₹2,00,000 for interest paid on a home loan.
- Section 80EE: If you are a first-time homebuyer, you can claim an additional deduction of up to ₹1,50,000 under Section 80EE.

Key Points to Remember:

No Double Benefit: You cannot claim both HRA and home loan interest for the same property. If you own a house and live in it, you cannot claim HRA.
Self-Occupied vs. Let Out Property: If you own multiple properties, you can claim interest on only one property as self-occupied. For the other properties, you can claim a deduction for rental income minus expenses, including interest on the home loan.
Pre-Construction Interest: If you paid interest on a home loan before the possession of the property, you can claim a deduction under Section 24B, subject to certain conditions.

Claiming HRA when living with parents

The HRA exemption rules allow you to enjoy tax deductions even if you are living with your parents. You may do so by paying your parents a certain amount as rent and deduct the sum when filing your tax. Moreover, your parents must declare the amount while filing their tax returns. Calculate your HRA here, and find out if it’s tax exempted or not.

While it’s generally not possible to directly claim HRA when living with parents, there are a few indirect ways to optimize your tax savings:

a. Rent-Free Accommodation:

No HRA: If your parents are providing you rent-free accommodation, you cannot claim HRA directly.
Home loan interest: If your parents have a home loan, and you are contributing to the repayment, you may be able to claim a deduction for the interest portion of your contribution.

b. Nominal Rent:

Symbolic Rent: If you pay a nominal rent to your parents, you can claim HRA based on the rent paid. However, the rent should be reasonable and not artificially inflated.
Documentation: You will need to provide evidence of the rent paid, such as rent receipts or a rental agreement.
Key Considerations:

Proof of Rent: If you are opting for the nominal rent , make sure you have proper documentation to support your claims.
Tax Implications: There are things to consider for your parents in terms of tax implications. They may need to report the rental income and deduct expenses, such as property tax and maintenance costs.

FAQs

Does the HRA amount change if you shift to a non-metro city?

Yes, HRA always depends on your city of residence. For example, if you move to a non-metro city from a metro city, the HRA will reduce to 40% of your basic salary from the previous 50%.

What if your employer does not allow the HRA tax benefit?

If your employer does not provide the tax exemption, it is not a cause of concern. You can claim the deduction while filing tax returns. You will receive the due amount as an excess TDS refund.