What is House Rent Allowance, HRA Exemption And Tax Deduction

What is House Rent Allowance, HRA Exemption And Tax Deduction

The Income Tax Department in India provides guidelines regarding the taxation of House Rent Allowance (HRA). Here's a brief explanation:

What is HRA?:

HRA, or House Rent Allowance, is an allowance provided by an employer to an employee to meet the cost of renting a house.

Tax Exemption: 

HRA received by an employee is partially exempt from income tax under Section 10(13A) of the Income Tax Act, subject to certain conditions.

Conditions for Exemption:
The employee must actually incur expenses for paying rent for accommodation occupied by them.
The accommodation must not be owned by the employee themselves.
The employee must not be living in a house owned by them, for which they do not pay any rent.

Amount of Exemption:

The amount of exemption is the least of the following:
> Actual HRA received from the employer.
> 50% of salary (basic salary + dearness allowance, if any) for employees living in metro cities (Mumbai, Delhi, Kolkata, or Chennai). For non-metro cities, it's 40% of salary.
> Actual rent paid minus 10% of salary.

Documents Required: 

To claim HRA exemption, the employee must submit rent receipts and a rent agreement, if applicable, to their employer.

Tax Deduction at Source (TDS): If the total income of the employee exceeds the basic exemption limit, they need to declare their HRA to their employer for the purpose of TDS calculation.

Self-Employed Individuals: Self-employed individuals or those who do not receive HRA cannot claim this benefit.
It's essential to comply with the guidelines set by the Income Tax Department to avoid any penalties or legal issues. Additionally, the rules and exemptions may change from time to time, so it's advisable to stay updated with the latest regulations.

For most employees, House Rent Allowance (HRA) is a part of their salary structure. Although it is a part of your 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.

Amount of HRA tax exemption is deductible from the total salary income before arriving at a gross taxable income. This helps an employee to save tax. But do keep in mind that the HRA received from your employer, is fully taxable if an employee is living in his own house or if he does not pay any rent.

Do keep in mind that every financial year, a salaried individual has to choose between the old and new tax regime, provided there is no business income. From April 1, 2023, the income tax laws for new tax regime has changed. The income tax slabs in new tax regime have been reduced from six to five. The basic exemption limit has been hiked to Rs 3 lakh. Standard deduction from salary and pension income has been introduced in new tax regime. The surcharge rate has been reduced from incomes above Rs 5 crore in new tax regime. There are no income tax changes for financial year 2024-25.

Hence, if an individual opts for new tax regime in current financial year 2024-25, then he/she cannot claim tax exemption for HRA. However, if he/she opts for old tax regime and receives HRA, then one can claim tax exemption.

Who can avail HRA tax exemption?

This tax benefit is available only to the salaried individuals (opting for old tax regime) who have the HRA component as part of their salary structure and is staying in rented accommodation. Self-employed professionals cannot avail this deduction.

Use our HRA calculator to save income tax

How much of HRA is tax-exempt as per income tax laws?

The tax exemption for HRA is the minimum of:
i) Actual HRA received
ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and
iii) Excess of rent paid annually over 10% of annual salary

For calculation purposes, the salary considered is 'basic salary'. In case 'Dearness Allowance (DA)' (if it forms a part of retirement benefits) and 'commission received based on sales turnover' is applicable, they too are added to compute the minimum HRA exemption available.

This tax benefit is available to the person only for the period in which the rented house is occupied.

Example of tax-exemption on HRA
For example, an individual, with a monthly basic salary of Rs 20,000, receives an HRA of Rs. 8,000 and pays Rs. 10000 rent for accommodation in a metro city. The tax rate applicable to the individual is 20 percent (i.e., between income tax slab of above Rs 5 lakh and up to Rs 10 lakh) on his income under the old tax regime.

To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:
i) Actual HRA received = Rs. 96,000 (8000 x 12)
ii) 50% of salary (metro city) = Rs. 1,20,000 (50% of Rs (20,000 x 12 = 2,40,000))
iii) Excess of rent paid annually over 10% of annual salary = Rs 96,000 (Rs .1,20,000* - (10% of Rs. 2,40,000))
*10,000X12 = 1,20,000

From the above example, the actual HRA received by an individual of Rs 96,000 will be exempt from tax. This is because the lowest amount is Rs 96,000 which will be exempt from tax.

Documents required to claim HRA tax exemption

HRA exemptions can be availed only on submission of rent receipts and the rent agreement with the house owner to the employer. According to tax experts, it is mandatory to have both rent agreements and rent receipts from the landlord to claim the HRA tax exemption. Further, an employee must report the PAN of the 'landlord' to the employer if the rent paid is more than Rs 1 lakh annually to avail of the tax benefit.

Special cases to claim HRA tax exemption

There could be special scenarios in claiming HRA tax benefits, such as:

1. Paying rent to Parents, wife, and family members
The rented premises must not be owned by the person claiming the tax exemption. So, if you stay with your parents and pay rent to them then you can claim that for tax exemption under HRA.

However, make sure you have documentary evidence as proof that financial transactions regarding your tenancy take place between you and your parent. So, keep a record of banking transactions and rent receipts, and rent agreements because your claim can get rejected by the tax department if they are not convinced by the authenticity of the transactions.

Also Read: Can someone claim HRA tax exemption for rent paid to wife, parent and family members?

Previously, there has been an instance in which the HRA claim of a salaried taxpayer was rejected by the Mumbai income tax appellate tribunal because the claim for HRA did not appear genuine to the tax officials.

However, paying rent to wife is subject to litigation as per tax experts. A salaried individual must have robust documents to prove the genuineness of the HRA tax exemption claim.

2. Own a house, but staying in a different city
One can avail simultaneous benefit of deduction available for the home loan against 'interest paid' and 'principal repayment' and HRA in case your own home is rented out and you work in another city.

Individuals who don't receive HRA but pay their rent

There may be some employees who might not have an HRA component in their salary structure. Also, a non-salaried individual might be paying rent. For them, Section 80GG of the Income-tax Act offers help.

An individual paying rent for a furnished/unfurnished accommodation can claim the deduction for the rent paid under Section 80(GG) of the Income-tax Act, provided he is not paid HRA as a part of his salary by furnishing Form 10B. This deduction is also available under the old tax regime only.

How much tax deduction is available under section 80GG
The least of the following is available for exemption from tax under Section 80GG:
(i) Rent paid more than 10% of total income
(ii) 25% of the total income*
(iii) Rs.5,000 per month

*Under this section, the total income is calculated as gross total income minus long-term capital gains, the short-term capital where Securities Transaction Tax (STT) has been paid, and deductions available under Sections 80C to 80U, except Section 80GG.

Conditions laid out to claim deduction under Section 80GG
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 is allowed.

One can avail of the simultaneous benefit of deduction available for the home loan against 'interest paid' and 'principal repayment' and HRA in case your own home is rented out or you work in another city. However, the same is not available in the case of Section 80GG.

What is House Rent Allowance, HRA Exemption And Tax Deduction
Maniraj Anantham 8 May, 2024
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