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
How is HRA calculated?
HRA is one of the key components of your salary structure. The amount depends on multiple factors. The HRA deduction available for you is the lowest of the below amounts:
- The actual HRA amount paid by your employer
- The rent amount that you pay minus 10% of your basic salary
- 50% of your basic salary if you live in a metro city
- 40% of your basic salary if you live in a non-metro city
Example of HRA calculation
Let us understand the HRA calculation with an example.
Rahul Agarwal lives in Mumbai and pays ₹12,000 as monthly rent for his accommodation. His basic salary is INR 30,000 a month and his employer pays him INR 15,000 as HRA (50% of basic salary).
As per the above scenario, Rahul’s actual yearly HRA is INR 15,000 x 12 months = INR 1,80,000
Actual annual rent paid over 10% of yearly basic salary is (INR 12,000 x 12 months) - 10% of (INR 30,000 x 12 months) = INR 1,44,000 – INR 36,000 = INR 1,08,000
As per the HRA calculation formula, Rahul can get an HRA tax deduction of INR 1,08,000 as it is the lowest of the two amounts. You may use an online HRA calculator to quickly determine how much exemption you can claim.
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, you are eligible to get 50% of your basic salary as HRA, while it is 40% for non-metro cities.
Documents required for HRA exemption
1. Rent receipts, which include the below details:
- Landlord’s name
- Your name
- 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.
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.
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.
What if your cities of work and residence are different?
The HRA calculation for income tax is applicable based on the place of residence. So, your HRA will be based on that and not your place of work.
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