Find out if you can claim HRA benefits when your rent is less than INR 1 lakh. Learn how to calculate taxable HRA amounts and strategies to maximise HRA benefits. Discover other tax-saving options available to help reduce your overall tax liability.
Introduction
HRA or House Rent Allowance is a component of an individual’s salary package provided by the employer to meet their rented accommodation expenses. It is a valuable tool for tax planning as it can help reduce an individual’s taxable income. However, there is a common misconception that HRA can only be claimed if it exceeds ₹ 1 lakh per year. In this blog, we will discuss whether an individual can claim HRA less than 1 lakh and how it can impact their income tax returns.
Understanding HRA and its Calculation
House Rent Allowance (HRA) is a component of an employee’s salary package provided by the employer to meet their rented accommodation expenses. HRA can be claimed by individuals who are living in a rented house and are paying rent for the same.
The calculation of HRA is based on the salary structure of the employee, the city in which they reside, and the rent paid by the employee. The HRA calculation is done by considering the lowest of the following three amounts:
- The actual HRA received from the employer
- 50% of the basic salary for those living in metro cities or 40% of the basic salary for those living in non-metro cities
- The actual rent paid minus 10% of the basic salary
There are certain conditions that must be met to claim HRA. The employee must be living in a rented accommodation and must be paying rent for the same. The rented accommodation should not be owned by the employee or their spouse or any other family member. Additionally, the employee must submit the rent payment proof to the employer to claim HRA.
Several factors impact the calculation of HRA, including the employee’s salary structure, the city in which they reside, and the actual rent paid by the employee. The higher the rent paid, the higher the HRA amount an employee can claim. The city in which the employee resides also plays a crucial role in the HRA calculation, as the HRA rates vary based on the city’s classification as a metro or non-metro city.
Claim HRA Less than 1 Lakh
It is a common misconception that an employee can only claim HRA if it exceeds ₹ 1 lakh per year. However, an individual can claim HRA less than 1 lakh if they meet the conditions for claiming HRA and their rent payment is lower than the amount calculated under the three criteria mentioned earlier.
If an individual’s HRA is less than 1 lakh, then the taxable amount of HRA is calculated as the difference between the actual HRA received and the amount calculated under the three criteria mentioned earlier. The difference amount is added to the employee’s taxable income, and the tax liability is calculated based on the individual’s tax slab rate.
The implications of claiming HRA less than 1 lakh are that the tax benefit received by the employee will be lower compared to an employee who is eligible to claim the full HRA amount. This means that the employee will end up paying more tax than someone who is eligible to claim the full HRA amount.
It is important to note that an individual can still claim other deductions and exemptions available under the Income Tax Act to reduce their taxable income and save on taxes. Some examples of tax-saving options include investing in tax-saving mutual funds, purchasing a health insurance policy, or making contributions to a retirement savings scheme.
Claim HRA- Maximizing HRA Benefits
While an individual may not be able to claim the full HRA benefit if their rent payment is lower than the amount calculated under the three criteria, there are still ways to maximize the HRA benefits.
One way to maximize HRA benefits is by negotiating a higher rent with the landlord. This would increase the rent paid by the employee, thereby increasing the HRA amount they can claim. However, it is important to note that the rent paid must be reasonable and in line with the market rates to avoid any legal issues.
Another way to maximize HRA benefits is by negotiating a higher salary component. By increasing the basic salary component, the 50% or 40% of the basic salary criterion used for calculating HRA would result in a higher HRA amount. However, this strategy may not be feasible for all employees, and the salary component negotiations must be done with the employer.
Apart from HRA, there are several other tax-saving options available to individuals. One can invest in tax-saving mutual funds or fixed deposits, purchase a health insurance policy, make contributions to a retirement savings scheme, or claim deductions on interest paid on a home loan.
Conclusion
Vakilsearch has developed an HRA calculator that assists employees in computing their HRA tax advantages according to their salary structure, rent paid, and city of residence. Benefits of using the Vakilsearch HRA calculator include precise calculations based on an employee’s salary structure, rent paid, and city of residence, ensuring accurate computation of the taxable HRA amount. It is user-friendly and accessible from any location with an internet connection, making it very convenient for employees to determine their HRA tax benefits in just a few minutes. Additionally, it saves employees time and effort that would otherwise be required to manually calculate their HRA tax benefits. Best of all, Vakilsearch’s HRA calculator is cost-effective and free to use, making it an affordable option for all employees.
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