HRA Tax Exemption: How to save tax on House Rent Allowance

Last Updated at: October 23, 2019
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HRA Tax Exemption How to save tax on House Rent Allowance

As per Section 10 (13A) of the Income Tax Act, 1961 salaried employees are entitled to house rent allowance on the house which is exempted from tax. House Rent Allowance (HRA) is received by an employee from his employer as a part of their salaried amount. The objective is to help the employee and provide them with certain tax benefits on their accommodation every year. It helps in reducing the taxable income of the employer.

Different factors are taken into consideration to decide the amount of the HRA that the employer will pay to its employees such as the city where the employee would be residing and the salary, he/she will get. The factor to be seen for getting an HRA exemption is:

  1. That the person is a salaried employee, i.e., self-employed people do not fall under this category. People who are self-employed can claim an exemption under section 80GG of the Income Tax act.
  2. That the employee is living in a rented apartment, which excludes people living in their own house or people who are not paying rent for their accommodation. Hence, HRA is fully taxable if not living in rented accommodation.

The purpose of the provision is to allow benefits to a salaried employee who is living in a rented apartment.

Criteria to decide the HRA

For the purpose of deciding HRA, the primary factor that is looked into is the amount of salary a person is receiving. Salary is the basic salary a person is receiving and will include if any, Dearness allowances and any other commission. Additionally, in case the employee is residing in metro then he/she will be entitled 50% of his salary as an HR and for cities other than metro the amount is 40% of his salary.

HRA for the purpose of tax benefit, in all possibility, is the lowest of the below-mentioned provision (lowest amount that will come):

  • The actual amount received as the HRA
  • Amount of excess rent paid over 10% of the annual salary
  • 50% in case of metro and 40% in case of non-metro

Example: Mr X is receiving Rs. 30,000/- as a basic salary and his HRA is Rs. 10,000/- and he is staying in Bangalore and paying house rent of Rs. 8,000/-.

On calculating the amount:

  • The amount received as HRA for a year: Rs 1,20,000/-
  • Actual rent paid less than 10% of basic salary: (Rs 96,000) – (36,000) = Rs. 60,000/-
  • As the employee is leaving in the metro, 50% of the salaried amount is Rs. 1,80,000/-

As the lowest of the three is taken as an amount for tax exemption, hence Rs. 60,000/- tax exemption Mr X will receive.

E-file Your Income Tax Returns

Documents Required while claiming exemption

A person claiming exemption should present a rent agreement which should be duly stamped. Rent receipt should have the following details:

  1. Name and signature of the landlord
  2. Complete address of the property where the person is residing
  3. Amount of Rent Paid
  4. Name of the tenant and the duration of stay

House Rent Allowance Rules

Following are the basic guidelines for the HRA claim:

  1. Amount of HRA cannot be more than 50% of your basic salary.
  2. An employee cannot ask to full exemption of the rent amount he/she is paying. It will be the lowest of the above three provisions.
  3. Tax benefit of HRA can be claimed along with the home loan interest deduction.
  4. Tax exemption is available on house rent if the employee is staying with his parents and giving house rent for the same, however, the exemption cannot be availed in cases where the employee is claiming to have paid rent to his spouse.
  5. Where the landlord in an NRI, person claiming exemption should deduct 30% of tax from the amount to be paid.
  6. Where the rent paid by the employee is more than Rs 1 lakh then in that case presenting the PAN card of the landlord is mandatory while claiming exemption. Where the landlord does not hold a PAN card, then he/she may make a self-declaration.
  7. Where the employer is not giving HRA, a person may still claim an exemption under section 80GG of the Income Tax Act. In this case, the least of the following is taken for exemption:
  • 25% of the total income a person receives
  • Rs 5,000 per month or
  • Whatever excess amount is paid off 10% of the total Income.

Where rent is paid by one or more members then the exemption will only be provided in cases where both are paying separate rent amount. For a single rent paid, only one can claim tax exemption.

HRA Tax Exemption: How to save tax on House Rent Allowance

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As per Section 10 (13A) of the Income Tax Act, 1961 salaried employees are entitled to house rent allowance on the house which is exempted from tax. House Rent Allowance (HRA) is received by an employee from his employer as a part of their salaried amount. The objective is to help the employee and provide them with certain tax benefits on their accommodation every year. It helps in reducing the taxable income of the employer.

Different factors are taken into consideration to decide the amount of the HRA that the employer will pay to its employees such as the city where the employee would be residing and the salary, he/she will get. The factor to be seen for getting an HRA exemption is:

  1. That the person is a salaried employee, i.e., self-employed people do not fall under this category. People who are self-employed can claim an exemption under section 80GG of the Income Tax act.
  2. That the employee is living in a rented apartment, which excludes people living in their own house or people who are not paying rent for their accommodation. Hence, HRA is fully taxable if not living in rented accommodation.

The purpose of the provision is to allow benefits to a salaried employee who is living in a rented apartment.

Criteria to decide the HRA

For the purpose of deciding HRA, the primary factor that is looked into is the amount of salary a person is receiving. Salary is the basic salary a person is receiving and will include if any, Dearness allowances and any other commission. Additionally, in case the employee is residing in metro then he/she will be entitled 50% of his salary as an HR and for cities other than metro the amount is 40% of his salary.

HRA for the purpose of tax benefit, in all possibility, is the lowest of the below-mentioned provision (lowest amount that will come):

  • The actual amount received as the HRA
  • Amount of excess rent paid over 10% of the annual salary
  • 50% in case of metro and 40% in case of non-metro

Example: Mr X is receiving Rs. 30,000/- as a basic salary and his HRA is Rs. 10,000/- and he is staying in Bangalore and paying house rent of Rs. 8,000/-.

On calculating the amount:

  • The amount received as HRA for a year: Rs 1,20,000/-
  • Actual rent paid less than 10% of basic salary: (Rs 96,000) – (36,000) = Rs. 60,000/-
  • As the employee is leaving in the metro, 50% of the salaried amount is Rs. 1,80,000/-

As the lowest of the three is taken as an amount for tax exemption, hence Rs. 60,000/- tax exemption Mr X will receive.

E-file Your Income Tax Returns

Documents Required while claiming exemption

A person claiming exemption should present a rent agreement which should be duly stamped. Rent receipt should have the following details:

  1. Name and signature of the landlord
  2. Complete address of the property where the person is residing
  3. Amount of Rent Paid
  4. Name of the tenant and the duration of stay

House Rent Allowance Rules

Following are the basic guidelines for the HRA claim:

  1. Amount of HRA cannot be more than 50% of your basic salary.
  2. An employee cannot ask to full exemption of the rent amount he/she is paying. It will be the lowest of the above three provisions.
  3. Tax benefit of HRA can be claimed along with the home loan interest deduction.
  4. Tax exemption is available on house rent if the employee is staying with his parents and giving house rent for the same, however, the exemption cannot be availed in cases where the employee is claiming to have paid rent to his spouse.
  5. Where the landlord in an NRI, person claiming exemption should deduct 30% of tax from the amount to be paid.
  6. Where the rent paid by the employee is more than Rs 1 lakh then in that case presenting the PAN card of the landlord is mandatory while claiming exemption. Where the landlord does not hold a PAN card, then he/she may make a self-declaration.
  7. Where the employer is not giving HRA, a person may still claim an exemption under section 80GG of the Income Tax Act. In this case, the least of the following is taken for exemption:
  • 25% of the total income a person receives
  • Rs 5,000 per month or
  • Whatever excess amount is paid off 10% of the total Income.

Where rent is paid by one or more members then the exemption will only be provided in cases where both are paying separate rent amount. For a single rent paid, only one can claim tax exemption.

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.