Meaning of HRA(House Rent Allowances)
House Rent Allowance (HRA) is generally paid as a component of a salary package.
This allowance is given by an employer to an employee to meet the cost of renting accommodation.
Although it is a part of the salary, HRA, unlike basic salary, is not fully taxable. Subject to certain conditions, a part of HRA is exempted under Section 10 (13A) of the Income Tax Act, 1961.
The amount of HRA exemption is deductible from the total income before arriving at a taxable income. This helps the employee save tax.
HRA Exemption
- The tax benefit is available only to a salaried individual who has the HRA component as part of his salary structure and is staying in rented accommodation.
- Self-employed professionals cannot avail the deduction.
Exemption Amount
Minimum of the following three is exempt:
- Actual HRA received
- Rent paid minus 10% of Salary
- 50% of salary if you live in Mumbai, Delhi, Kolkata or Chennai, otherwise 40% of Salary.
(Salary means Basic Salary + Dearness Allowance + Commission based on a fixed percentage of turnover achieved by an employee. Most of the private sector companies don’t have the last two components in the salary package.)
HRA Calculation
- Basic Salary: Rs 30,000 per month, i.e. Rs 360,000 for the year
- HRA: Rs 10,000 per month, i.e. Rs 120,000 for the year
- Rent paid: Rs 8,000 per month, i.e. Rs 96,000 for the year (House in Chennai)
HRA Exemption
HRA received: Rs 120,000
Exempt: Minimum of following,
- Actual HRA: Rs 120,000
- Rent less 10% of Salary: Rs 96,000 – (10% of 360,000): Rs 60,000
- 50% of Salary: Rs 180,000
Thus Rs 60,000 HRA is exempt and balances Rs 60,000 HRA is taxable. Thus out of Rs 480,000 Salary package; Rs 420,000 is taxable and Rs 60,000 is exempt (For the time being let’s ignore all other exemptions under Income Tax Act).
Documents that are necessary for availing HRA Exemptions
HRA exemptions can avail only on submission of rent receipts or the rent agreement with the house owner.
It is mandatory for the employee to report the Pan Card of the ‘landlord’ to the employer if the rent paid is more than Rs.1,00,000 annually, or if it exceeds Rs.15,000 per month.
Exemption amount availed of
The least of the following is available for exemption from tax under Section 80GG:
(i) Rent paid in excess of 10% of total income
(ii) 25% of the total of the total income*
(iii) Rs.5,000 per month.
Conditions
- While claiming a tax deduction, one must remember that the individual himself or his/her spouse, or minor child, or as a member of the Hindu Undivided Family (HUF) must not own any accommodation.
- Also, if the individual owns any residential property at any place and earns rent from it then no deduction allows.
- One can avail the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home rent out or you work in another city.
- However, the same is not available in the case of Section 80GG.
- For claiming HRA exemption on rent, the rented premises must not be owned by the person claiming the tax exemption. Thus, if you live with your parents and pay rent to them then you can claim that for tax deductions as HRA.
- Even if you are renting the house from your parents, you must have documentary proof of financial transactions regarding tenancy.
- Thus a record of banking transactions and rent receipts must be available because your claim can get rejected by the tax department if they are not convinced of the authenticity of the transactions.
- One can avail the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home rent out or you work in another city.
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