Discover the rules of HRA and how it affects your income tax returns. Learn about taxable HRA, rent payment proof, and common misconceptions in this guide.
Overview of Rules of HRA
House Rent Allowance (HRA) is a component of salary provided by employers to employees for meeting their rental accommodation expenses. HRA is a significant part of Indian taxation as it is eligible for tax exemption under certain conditions. It is crucial to understand the rules of HRA to claim exemption accurately and avoid any penalties or legal issues. In this blog, we will discuss the HRA rules in detail to help readers understand how to claim an HRA exemption.
HRA, or House Rent Allowance, is a component of an employee’s salary package, which is provided to help them pay for their accommodation expenses. The eligibility for HRA and criteria for claiming it depend on various factors, including the employee’s salary, place of residence, and employer policies.
Eligibility for HRA
All salaried employees are eligible for HRA, provided their employer offers it as a component of their salary package. However, self-employed individuals and those who are not salaried employees are not eligible for HRA.
Required Documents to Claim HRA Tax Exemption
To claim HRA tax exemption, you need to keep the following documents handy:
- Rent Receipts: To claim HRA, you may need to submit rent receipts for the financial year. The rent receipts should contain details such as the name and address of the landlord, the amount of rent paid and the period for which the rent is paid.
- Rent Agreement: You may also need to show a rental agreement if the rent paid is more than Rs. 1 lakh per annum. The rent agreement should be signed by both the landlord and the tenant and should contain details such as the period of the agreement, the rent amount and the mode of payment.
- PAN Card of the Landlord: You may also need to submit the PAN card of the landlord if the rent paid is more than Rs. 1 lakh per annum.
What to Do If we Do not Receive HRA?
If you do not receive HRA as a component in your salary, you can still claim a deduction for rent paid under Section 80GG of the Income Tax Act. However, the deduction is subject to certain conditions. The maximum deduction allowed under this section is Rs. 5,000 per month or 25% of the total income, whichever is less. To claim this deduction, you need to submit Form 10BA along with your income tax return.
Union Budget Highlights in House Rent Allowance (HRA)
In Budget 2023, Finance Minister Nirmala Sitharaman did not introduce any changes to the calculation of tax exemption on HRA. This means that the existing rules and limits for claiming tax exemption on HRA remain the same under the provisions of the Income Tax Act.
How To Calculate HRA?
To calculate HRA, you need to know the following three components:
- Actual rent paid
- HRA received from the employer
- Basic salary
The HRA calculation is based on the lowest of the following three components:
- Actual rent paid minus 10% of the basic salary
- HRA received from the employer
- 50% of the basic salary (for metro cities) or 40% of the basic salary (for non-metro cities)
Rules of HRA – Claiming HRA
To claim HRA there are certain Rules of HRA, employees need to fulfill the following criteria:
- The employee must be paying rent for the accommodation they are staying in.
- The rented accommodation must not be owned by the employee or their family member.
- The employee must provide the necessary rent receipts as proof of their rent payment to the employer.
- The employee must be living in the rented accommodation for which they are claiming HRA.
- The amount of HRA claimed by the employee should not exceed the actual rent paid by them.
Differences Between Employees Living in Metro and Non-metro Cities:
The amount of HRA that an employee can claim depends on the city/town they are living in, as per the guidelines provided by the Income Tax Department. Employees living in metro cities (such as Delhi, Mumbai, Chennai, Kolkata, Hyderabad, and Bangalore) can claim a higher amount of HRA compared to those living in non-metro cities. This is because the cost of living in metro cities is usually higher than non-metro cities. The HRA calculation is based on the employee’s basic salary and the city/town they are residing in, with a maximum limit of 50% of the basic salary for metro cities and 40% for non-metro cities.
Tax Implications of HRA
HRA or House Rent Allowance is a component of the salary package that employers provide to their employees for meeting their rental expenses. The tax implications of HRA depend on various factors such as the employee’s salary structure, the rent paid by the employee, and the city of residence.
Tax Implications of HRA on Income Tax Returns
The amount received as HRA is partially taxable under the Income Tax Act. However, the taxable HRA amount is calculated based on the following three components:
- Actual HRA Received: The actual amount received by an employee as HRA from the employer during the financial year.
- Rent Paid: The actual rent paid by the employee for the accommodation during the financial year.
- Salary Structure: The employee’s salary structure, which includes basic salary, dearness allowance, and any other taxable allowances.
The taxable HRA amount is calculated as follows:
- Actual HRA Received: The actual amount received by an employee as HRA from the employer during the financial year.
- Rent Paid – 10% of Basic Salary: The actual rent paid by the employee for the accommodation during the financial year minus 10% of the basic salary.
- 50% of Basic Salary: 50% of the basic salary if the rented accommodation is situated in Mumbai, Kolkata, Delhi, or Chennai. For other cities, the percentage is 40% of the basic salary.
Rules of HRA – Common Misconceptions
There are several common misconceptions about HRA. Some of the most prevalent misconceptions include:
- HRA is tax-free: One of the most common misconceptions about HRA is that it is completely tax-free. While a portion of HRA is exempt from tax, the remaining amount is taxable. The taxable HRA amount is calculated based on the actual HRA received, the rent paid, and the employee’s salary structure.
- HRA can be claimed without renting a house: Another common misconception is that employees can claim HRA without renting a house. However, to claim HRA, an employee must provide proof of rent paid towards rented accommodation.
- HRA can be claimed for self-owned property: Some employees believe that they can claim HRA for a self-owned property. However, HRA can only be claimed for rented accommodation and not for a self-owned property.
- HRA can be claimed for the entire rent amount: Some employees believe that they can claim HRA for the entire rent amount paid towards rented accommodation. However, the amount of HRA that can be claimed is limited to the actual rent paid towards rented accommodation.
- HRA can be claimed without submitting rent receipts: Another common misconception is that employees can claim for Rules of HRA without submitting rent receipts. However, to claim HRA, employees must submit rent receipts as proof of rent paid towards rented accommodation.
The impact of these misconceptions on tax filing can be significant. If an employee claims HRA without meeting the necessary conditions, they may face penalties, interest, and legal action. Additionally, if an employee claims incorrect or incomplete HRA, they may end up paying more tax than necessary. Therefore, it is important for employees to understand the facts behind these misconceptions and ensure that they meet the necessary conditions before claiming HRA. It is also important for employees to maintain proper records of their rent payments and HRA received to avoid any discrepancies during tax filing.
FAQs:
1. What is the difference between HRA and rent receipt?
HRA is an allowance provided by the employer to the employee to meet the expenses of renting a house. On the other hand, a rent receipt is a document provided by the landlord as proof of payment of rent.
2. If I don't receive HRA as a component in my salary, can I still claim a deduction for rent paid?
Yes, you can still claim a deduction for rent paid under Section 80GG of the Income Tax Act subject to certain conditions.
3. Is there any minimum limit on the rent paid to claim HRA?
No, there is no minimum limit on the rent paid to claim HRA. However, the HRA exemption is limited to the actual rent paid or the HRA received from the employer or the prescribed limit, whichever is lower.
4. Can I claim HRA and home loan benefits simultaneously?
Yes, you can claim HRA and home loan benefits simultaneously if you are paying rent for the house you are living in and also paying the EMI for the home loan taken for another house. However, the tax benefits for both cannot be claimed for the same house.
Conclusion:
Vakilsearch‘s Rules of HRA is designed to help employees calculate their HRA tax benefits based on their salary structure, rent paid, and the city of residence.
Helpful Links:
