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House Rent Allowance (HRA) Calculation

House Rent Allowance is a component of the salary paid to employees by their employers for meeting the cost of renting a home. It offers tax benefits to the employees for the sum they pay towards their accommodation each year. Salaried individuals residing in rented homes can claim this exemption and reduce their tax liability. The employer determines how much HRA is to be paid to the employees, according to certain criteria like the city of residence, salary, etc. Provisions relating to HRA can be found under Section 10(13A) of the Income Tax Act, 1961.

An essential point to be noted is that salaried individuals who have the HRA component as part of their salary structure and are living in rented homes can only claim HRA tax benefit. Self-employed individuals cannot claim this benefit.

Factors that Affect HRA Calculation

While computing HRA for tax exemption, four factors of a salaried individual are taken into consideration:

  • Salary

  • Actual rent paid

  • HRA received

  • Place of residence (metro or non-metro)

If these remain constant through the year, tax exemption will be assessed as a whole annually. In case of any change, such as pay hike, shift of residence, etc. the amount will be computed on a monthly basis.

How much HRA is Exempt from Tax?

The whole of HRA received by employees is not always fully tax exempt. The actual HRA offered will be the least of the following three:

  • The amount received as HRA from the employer

  • Actual rent paid minus 10% of salary

  • 50% of basic salary for those living in metro cities and 40% for those living in non-metro cities

To understand how the HRA tax exemption is calculated, consider this example:

Mohit lives in Mumbai and draws a basic salary of Rs. 20,000 per month. The HRA provided by his employer is Rs. 10,000 every month and Mohit pays Rs. 8,000 as rent every month. The exemption that Mohit can claim will be the minimum of the following three options:

Actual house rent allowance received from the employer = Rs. 10,000 Actual rent paid less 10% of salary = 8,000 - 10% of 20,000 = Rs. 6,000 50% of basic salary = Rs. 10,000

Here in Mohit’s case, the HRA amount that will be exempt from tax is Rs. 6,000, since it is the least of the three scenarios.

Rules for HRA Claims

The following are the rules pertaining to HRA claims:

  • HRA cannot surpass 50% of the basic salary.

  • It is not possible to claim tax exemption on the full rental amount that is being paid. The exemption allowed will be the least of the following three options:

    1- The amount received as HRA from the employer

    2- Actual rent paid minus 10% of salary

    3- 50% of basic salary for those living in metro cities and 40% for those living in non-metro cities

  • HRA tax benefits can be availed together with a home loan.

  • If an employee is residing with his or her parents, the individual can pay them rent, get a receipt of the payment and then make a claim of HRA. It must, however, be noted that it is not possible to claim HRA for rent paid to spouse.

  • It is compulsory to present the PAN card of your landlord in case the rent crosses Rs. 1 lakh during a year. If the landlord does not have a PAN card, he or she can provide a self-declaration on a paper.

  • Should the landlord be an NRI, then 30% tax needs to be deducted from the rent amount that is required to be declared.

Proof of HRA

  • In case the total amount claimed as HRA is up to Rs. 3,000 a month, there is no need for proof, just a declaration will suffice.

  • In case the total amount claimed as HRA is between Rs. 3,000 and Rs. 8,333 a month, then rent slips with the signature of the landlord is required.

  • In case the total amount claimed as HRA is more than Rs. 8,333 a month, then rent receipts with the signature of the landlord and PAN number of the landlord are required. If the landlord does not have a PAN card, he or she can provide a self-declaration on a paper.

Claiming Tax Benefits on Home Loan and HRA

Tax benefits on HRA can be claimed by an individual as long as he or she is paying rent towards the accommodation. To avail tax benefits on home loan and HRA at the same time, the individual must have rented out his or her home and is himself or herself staying at a rented place.

In case the owned and the rented house are in the same city, then it is not possible to claim tax exemption on both. But, if the individual can prove that the property he or she owns is far from work, and has therefore rented a place, then tax exemption can be claimed on both HRA and housing loan.

FAQs of HRA Calculation

What is HRA?

House Rent Allowance is a component of the salary paid to employees by their employers for meeting the cost of renting a home. It offers tax benefits to the employees for the sum they pay towards their accommodations each year. Salaried individuals residing in rented homes can claim this exemption and reduce their tax liability. The employer determines how much HRA is to be paid to the employees, according to certain criteria like the city of residence, salary, etc. Provisions relating to HRA can be found under Section 10(13 A) of the Income Tax Act, 1961.

Can I claim HRA exemption if I pay rent to my family members?

In order to claim HRA exemption on rent, the first rule is that the person claiming the tax exemption cannot be the owner of the rented premises. So, if you are living with your parents and pay them rent, then you can claim HRA exemption. To claim the tax benefits, you must ensure that you have documentary proof of the transactions regarding the tenancy. It should be noted that it is not possible to claim HRA benefits for rent paid to spouse.

What are the documents necessary to claim HRA exemption?

The following documents need to be submitted to claim HRA exemption:

  • PAN card details of landlord (in case rent paid exceeds than Rs. 1 lakh per annum)

  • Rent receipts

  • Copy of rent agreement (if required)

What do I do if I have forgotten to handover the rent receipts to my employer?

If, for any reason, you have not been able to submit rent receipts to your HR, you can still claim HRA tax benefits later at the time of filing your income tax returns. For claiming this benefit, adjust your taxable income to include HRA and compute tax to be paid on the lowered taxable income. You will then be able to claim a refund in case excess tax has been deducted.

Can both working spouses separately claim HRA tax benefit?

Yes, working spouses can separately claim HRA tax benefit if they are both paying the rent and are able to furnish separate receipts for it. It should be ensured that there isn't any duplication that could cause the income tax department to deduct tax twice from landlord's income from property.

How is the HRA exemption amount ascertained?

The whole of HRA received by employees is not always fully tax exempt. The actual HRA offered will be the least of the following three:

  • The amount received as HRA from the employer

  • Actual rent paid minus 10% of salary

  • 50% of basic salary for those living in metro cities and 40% for those living in non-metro cities

Can a self-employed person claim tax benefit on the rent paid?

Given that the self-employed person does not earn salary, he or she will not receive HRA, which means there is no question of claiming HRA exemption under Section 10(13 A) of the Income Tax Act, 1961. However, there is a separate provision wherein an individual who does not receive HRA but pays rent expenses for his or her residence can claim a deduction under Section 80GG, which is rather similar to Section to 10(13A), but with a few additional conditions.

When is it not possible to claim HRA exemption?

If you are receiving HRA, but staying in our own house, such that you are not incurring any rent expense, then you cannot claim the HRA exemption benefit. The entire HRA sum that is received by you shall be taxable.

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