House Rent Allowance (HRA)

Introduction

House Rent Allowance, commonly known as HRA, is a crucial component of the salary package for most employees. It is designed to help employees manage the cost of living in rented accommodation. This allowance not only supports employees in meeting their housing needs but also offers tax benefits, making it an essential aspect of financial planning for salaried individuals. In this guide, we’ll delve into the details of HRA, its calculation, tax implications, and much more.

What is House Rent Allowance (HRA)?

House Rent Allowance (HRA) is an allowance provided by employers to employees to cover the cost of renting a house. It is a part of the salary structure and is partially or fully exempt from taxes under Section 10(13A) of the Income Tax Act, of 1961. The exemption is subject to certain conditions, which we will explore in this guide.

HRA is a significant benefit for employees who live in rented accommodation, as it allows them to save on taxes while meeting their housing expenses. However, it’s important to note that if an employee resides in their own house, the entire HRA received becomes taxable.

Eligibility for HRA

HRA is primarily available for those living in a rented house, are salaried and have an HRA component in their salary structure. Self-employed individuals, however, cannot claim HRA benefits under Section 10(13A) but can avail of deduction under Section 80GG of the Income Tax Act.

HRA for Salaried Individuals

For salaried individuals, HRA exemption is governed by Section 10(13A) and Rule 2A of the Income Tax Act. The exemption is calculated based on various factors such as salary, HRA received, rent paid, and the city of residence.

HRA for Self-Employed Individuals

Self-employed individuals are not eligible for HRA benefits as they do not receive a salary. However, they can claim deductions on rent paid under Section 80GG, which is subject to specific conditions.

You may also want to know Conveyance Allowance

How to Claim HRA Exemption?

House Rent Allowance (HRA) is a component of an employee’s salary that provides tax benefits for rent paid. To claim HRA exemption under Section 10(13A) of the Income Tax Act, follow these steps:

1. Eligibility:

Ensure that you are a salaried employee receiving HRA from your employer. You must be paying rent for a residential accommodation, and it should not be owned by you.

2. Calculate Exemption:

The HRA exemption amount is the minimum of the following:

• Actual HRA received from the employer.
• Rent paid minus 10% of the basic salary.
• 50% of the basic salary (if you live in a metro city – Delhi, Mumbai, Kolkata, or Chennai) or 40% if you live in a non-metro city.

3. Documentation Required:

To claim the exemption, you need to provide rent receipts or a rent agreement. If the rent paid exceeds ₹1,00,000 annually, you will need to submit the landlord’s PAN details as well.

4. Submit Proofs to Employer:

Submit all required documents, such as rent receipts, to your employer. Most companies require these proofs to be submitted at the beginning or mid-year. By doing this, the employer considers HRA exemption while deducting TDS from your salary.

5. File Income Tax Return:

Even if you have not submitted proofs to your employer, you can still claim the HRA exemption while filing your income tax returns by showing the rent paid and calculating the exemption. However, ensure to keep all relevant documents ready in case of any verification.

The HRA exemption is calculated as the lowest of the following three amounts:

• Actual HRA received from the employer.
• 50% of the basic salary for employees living in metro cities (40% for non-metro cities).
• Rent is paid minus 10% of the basic salary.

Let’s illustrate this with an example.

Example of HRA Calculation

Consider Mr. Shiva, a salaried employee living in Mumbai. He pays a monthly rent of ₹10,000, which totals ₹1.2 lakh per year. His monthly earnings are as follows:

In Mr. Shiva’s case, the tax-free portion of his HRA will be calculated as the lowest of the following:

The lowest value among the three is ₹84,000, which is the amount exempted from tax. The remaining HRA of ₹72,000 (₹1.56 lakh – ₹84,000) will be taxable as per Mr. Shiva’s income tax bracket.

Documents Required for HRA Exemption

To claim HRA exemption, employees need to submit the following documents:

1. Rent Receipts: The primary document required is rent receipts provided by the landlord. These receipts should include the landlord’s name, address, rent amount, and the duration for which rent was paid.
2. Rental Agreement: In some cases, employers may ask for a copy of the rental agreement as additional proof of rent payment.
3. Landlord’s PAN: If the annual rent exceeds Rs. 1 lakh, it is mandatory to provide the PAN (Permanent Account Number) of the landlord.

You may also want to know Section 80GG

Tax Implications of HRA

While HRA offers tax benefits, it’s important to understand the tax implications:

1. Tax Deduction:

The HRA component of your salary is eligible for tax exemption under the Income Tax Act, reducing your taxable income. The exemption depends on factors such as your salary, HRA received, rent paid, and the city where you reside.

2. Impact of Owning Property:

If you own a house but live in a different city due to work, you can still claim HRA. However, if you live in your own house, you cannot claim HRA benefits. Instead, you can claim home loan deductions under Sections 24(b) and 80C of the Income Tax Act.

3. Declaration for Shared Rent:

If you share accommodation, only your portion of the rent can be claimed for HRA exemption. Ensure that your name is on the rent agreement, and you provide the actual amount you pay as rent.

4. Exemption for Multiple Homes:

You can claim HRA exemption even if you are paying rent for multiple properties. However, proper documentation must be maintained, and the total rent paid should be eligible for calculation as per the rules mentioned above.

5. Adjustment with Employer’s TDS Deduction:

Employers calculate the tax to be deducted at source (TDS) based on the HRA exemption claimed. If you miss submitting proofs to the employer, the TDS will be higher, and you may need to claim the exemption while filing your income tax return.

In summary, HRA is a beneficial tax exemption that allows salaried employees to save on taxes while covering rental expenses. However, understanding how it is calculated and ensuring proper documentation are key to maximizing this benefit.

Conclusion

House Rent Allowance (HRA) is a vital component of a salaried individual’s income that provides significant tax benefits while helping manage the cost of rented accommodation. Understanding the eligibility criteria, calculation methods, and documentation requirements is crucial for maximizing these benefits.

By effectively claiming HRA exemptions, employees can reduce their taxable income and enhance their savings. It’s also important to stay informed about the latest tax regulations to ensure compliance and make the most of the available benefits.