House Rent Allowance
House Rent Allowance is a component of Income for a salaried individual provided by the employer towards rented accommodation. The primary aim of HRA is to help employees in obtaining tax benefits on rental accommodation payments every year. The final decision on the amount of HRA to be paid to the employee lies with the employer. It is generally based on the job position, salary, and the city of residence.
House Rent Allowance is regulated by Section 10(13A) of the Indian Income Tax Act, and it has proven to be of great benefit to India's salaried population.
Income Tax law states that only salaried professionals who live in rented home are eligible to claim HRA. Self-employed people are exempt from the same. An individual who stays in their own house without paying rent cannot claim HRA to save on taxes.
But under Section 80GG, one can claim tax exemption for HRA if he is salaried or self-employed, but living in a rented place is a compulsory requirement. Someone who has his place and gets HRA from his employer cannot enjoy tax benefits under Section 80GG.
Eligibility Requirements for HRA
The eligibility requirements to avail of House Rent Allowance exemption are as follows:
- The individual must be a salaried employee
- The salary structure for his position in his organization must include the House Rent Allowance component
- He must be residing in rental house.
The amount of HRA calculated primarily depends on the individual's salary and the city where he resides. If he lives in a metro city, he is entitled to receive HRA equal to 50% of his salary. If he lives in a city other than the 4 metros, the entitlement is restricted to only 40% of the salary.
How to calculate HRA?
House Rent Allowance is determined based on factors such as one’s salary and city of residence. If an individual resides in a metropolitan city, his HRA will be equivalent to 50% of the basic salary. In other cities, the HRA will be equivalent to 40% of the basic salary. In this case, the amount he gets paid will be the sum of basic salary, dearness allowance, and other commissions provided by his organization. If the employee does not get any dearness allowance and commissions, the HRA he gets will be equivalent to 40% to 50%.
HRA amount to be paid to the employee will be calculated based on the components below:
- Actual rent paid minus 10% of his basic salary
- The actual amount of HRA given to the employee
- 50% of the basic salary if the employee is in a metro city (40% for non-metros)
The minimum of the above 3 amounts is the amount of HRA one can claim for tax deduction under Section 10 of the Income Tax Act.
For calculation purposes, the salary consists of a basic salary. If Dearness Allowance (DA) forms a portion of retirement benefits and commission received is based on the sales turnover, they are added to the computer the minimum amount of house rent allowance amount for a tax deduction.
The tax benefit on HRA is available to an individual only for the period for which the rented house remains occupied.
Let us take the example of a salaried individual, Rahul Sharma, who lives in a rented apartment in Mumbai to understand how HRA is calculated. Assume he pays Rs 10,000 per month as rent amounting to Rs. 1.2 lakhs annually. Given below are monthly earnings:
Basic Salary = Rs.30,000
HRA = Rs. 13,000
Conveyance = Rs. 2,000
Special Allowance = Rs.3,000
Medical Allowance = Rs. 1250
Leave Travel Allowance = Rs. 5000
Total earnings = Rs. 54,250
A Provident Fund of Rs. 2000 and a professional tax of Rs. 200 are deducted from his account monthly.
Based on the above details let us calculate the HRA he can claim for this salary package:
- Actual rent paid annually (12x10,000) – 10% of basic salary(10% x 3,60,000) = 1,20,000 – 36,000 = Rs. 84,000
- Actual annual HRA amount given by the employee = Rs. 13,000 x12 = Rs. 1,56,000
- 50% of his basic annual salary = 50% of 3,60,000 = Rs. 1,80,000
The least of the above 3 figures is the HRA deduction amount that can be claimed for a tax deduction, Rs. 84,000.
Read Also: HRA Exemption Calculator
Benefits of House Rent Allowance
House Rent Allowance is the most effective tax-saving tool for salaried employees living in rental place. It serves as a great medium to reduce the annual taxable income, which in turn reduces the amount of tax they need to pay.
If an individual has a home loan and availing tax benefits for it, he can still avail of the HRA allowance from his employer. This is allowed fewer than 2 situations only – if he has rented his property to someone else or stays in his rental accommodation by himself. In any case, he needs to account for his rental income while tax filing under "Income from other sources" to apply for an exemption.
House Rent Allowance feature significantly eases the burden of house rent on salaried people and brings more benefits than they expect.
HRA Exemptions Rules and Regulations
Here is a rundown to HRA exemptions rules and regulations:
When one is calculating HRA for tax exemption, he needs to consider 4 aspects, mainly which are basic salary, actual HRA received, actual rent paid, and the city he resides in (whether it is a metro or non-metro). If these components remain the same throughout the financial year, tax exemption is calculated annually as a whole. If these aspects are bound to change as in rent is hiked, salary is increased, or city of residence is shifted, and so on, then the amount is calculated monthly, which is more common.
The city of residence is a significant factor in HRA calculation as the tax exemption is 50% of basic salary in metros and 40% of basic salary for non-metros. If the employee works in a metro city but resides in a non-metro city, then the city of residence will only be considered while computing the HRA amount.
Rent paid to relatives
The common question that comes is whether the rent paid to one's spouse or parents is eligible for HRA benefits? Rent paid to parents is eligible for deduction. All one must do is enter into a rental agreement with their parents and transfer money to them every month. But the parents who receive rent must pay tax or account it in their taxable income.
However, rent paid to one's spouse does not carry merit under the income tax law. Because of the married relationship, the husband and wife are expected to rent a residence together, and any other way would only be considered as dubious transactions.
But if the wife owns the house, the husband can pay the rent to her and claim HRA. In this case, the rent amount would be combined under the wife’s income under the head, “Income from Property” and corresponding tax levied.
If the wife does not have any income source, and the husband has bought the house for his wife, the income will be combined with the husband’s income and tax.
Document Proof for HRA Claim
The employee needs to submit the rent receipts as document proof to claim deduction on his HRA if the rent amount is over Rs.3000. One receipt must be submitted at the beginning of the year, while the other one must be submitted at the end of the year. The receipt must have Re 1 revenue stamp affixed to it and bear the signature of the owner who received the rent along with the rental address, name of the person who rents it, and the rent paid.
If the rent per annum is above Rs 1 Lakh, the landlord's PAN card will need to be submitted to claim a deduction for House Rent Allowance. If the landlord does not have a PAN card, a written declaration from him stating the same must be obtained and submitted. It is advisable to obtain the Permanent Account Number details or declaration before taking the house on rent to avoid any hassles in the future. This step must be undertaken to avoid the following loopholes:
- To prevent dubious claims on House Rent Allowance
- Make the landlord furnish the correct rent information
Home Loan and HRA
Tax benefits for a home loan and House Rent Allowance are 2 separate entities and do not impact each other. As long as one is paying rent for accommodation, he can claim a tax deduction for the HRA component of the salary and provide tax benefits on his home loan. This situation typically arises when the professional owns a home in one city and works out of another city, or he has rented his own home to someone else, and he continues to stay in a rented property. In any of these cases, he must account for the rent income during tax filing under the section, "Income from other sources."
One can claim a tax deduction on HRA for the rent paid, the home loan interest paid, and the principal loan repayment.
What if the employer does not give HRA?
If a salaried professional is making rent payments for a furnished or unfurnished home occupied by him but does not receive HRA from him, employer, tax deduction can be claimed under Section 80GG. The least of the below amounts will be considered for 80GG deduction:
- 25% of the total income
- Rs.2000 per month
- Actual rent minus 10% of income
In the above cases, income includes long term and short-term capital gain under section 111A, income under section 115A, or 115Dand deductions 80C to 80U.
Claiming Deduction under Section 80GG
Conditions that must be fulfilled to claim deduction under Section 80GG are:
- The individual must be self-employed or salaried
- He must not have received any HRA amount during the year he is claiming 80GG
- The individual or his spouse, minor child, or HUF must not own any residential property where he currently resides, performs office duties, professional employment, or pursues any business
In case the individual owns residential property at a place where he is earning income from house property under specific sections, he is not allowed to claim deduction under section 80GG.
HRA claim by both husband and wife
Both husband and wife can claim House rent allowance if both are paying rent to the landlord, and both are giving separate rent receipts for the rent paid to the landlord. Husband and wife can proportionately claim HRA exemption, but they both cannot claim the entire amount of rent paid to their landlord.
HRA when accommodation is changed
In case a situation arises where one moves his rental location multiple times due to change in his jobs, he will pay rent to different landlords. In this case, he must hold on to all rent receipts and PAN card details of the landlord (if rent is greater than 1 lakh).
HRA for Shared Accommodation
Some salaried professionals may share their apartment with friends and split the rental charges. In these cases, while availing HRA deduction, they must ensure the rent agreement has the names of all the house inmates with the amount paid by each towards rent. The contribution by the individual filing for deduction must be mentioned as well.
Steps to claim HRA
There are only 2 basic things to do by salaried individuals to avail of HRA exemption:
Declare their rental details in the income declaration form provided by the employer along with other declarations such as loans, investments for correct estimation of the TDS amount due.
Collect and submit all rent receipts as documentary proof of their rent payment to the employer, mostly during the beginning of each financial year, typically January or February. The name of the tenant, duration for which the rent is paid, addresses of the rented accommodation, Name and PAN number of landlord, and his signature with date.
Some employers also ask for lease agreement as an added document proof.
Documents Required Claiming a Tax Deduction on HRA
To avail of HRA exemptions, the taxpayer must submit his or her rent receipts or, in some cases, rent agreement made with the landlord. The rent receipt must have the following information:
- Name of the Landlord
- Duration of stay in the rented property
- Rent Amount
- PAN card number (if the amount is more than 1 lakh)
In case the salaried professional lives in a rented accommodation whose rent exceeds Rs. 1 lakh a year, then the PAN details of the landlord must also be furnished along with the HRA claims. In case the landlord does not have one, he can provide a self-declaration.
Ans: No. One cannot claim HRA if he lives in his own house.
Ans: When one stays in rented accommodation but also owns his home, he can claim house rent allowance as well as exemptions on home loan interest at the same time.
Ans: For claiming HRA exemption, one must produce all the rent receipts. If the rent amount exceeds 1 lakh annually, he must produce the PAN number of the landlord or written consent if the it is not available.
Ans: No. HRA deduction can only be claimed for one home in the concerned city, which must be the taxpayer's workplace.
Ans: No. Electricity charges cannot be claimed as a part of HRA deduction. It is not considered as the landlord’s earning as it is paid directly to the electricity provider.
Ans: No. Maintenance charges cannot be claimed as a part of the HRA as they are not considered a part of the landlord's earnings.
Ans: No. House Rent Allowance or HRA falls under Section 10(13A) of the Income Tax Act.
Ans: The PAN card details of the landlord are furnished as proof when an individual submits the claim for HRA deduction for a rent amount exceeding Rs. 1 lakh per annum. If the landlord does not have a PAN card, he must submit a declaration stating the same with all the details of the landlord and the rent amount.
Ans: HRA forms a part of the salary given by the employer to any salaried professional if he stays in rented accommodation.
Ans: For HRA calculation, the lowest of the below 3 amounts is taken into consideration:
- Sum received from the employer as actual HRA
- Actual rent paid minus 10% of salary
- 50% of basic salary for those living in metro cities and 40% of the basic salary for those living in non-metro cities