This article offers a thorough tutorial on how to reduce income tax on House Rent Allowance (HRA) under the previous Indian tax system. It offers advice on how to use HRA and home loan advantages, submit rent receipts, claim actual rent paid, and comprehend and calculate HRA.
As an Indian taxpayer, saving money on income tax is always a top priority. One of the most effective ways to save income tax is by claiming the House Rent Allowance (HRA) exemption. HRA is an allowance provided by the employer to the employee to meet the expenses of rent paid for accommodation. In this article, we will discuss how to save income tax on HRA under the old tax regime.
Understanding and Calculate HRA
To claim the HRA exemption, one needs to understand how it is calculated. The HRA exemption is calculated as the minimum of the following three:
- Actual House Rent Allowance received from the employer
- 50% of the employee’s basic salary (if living in a metro city) or 40% of the employee’s basic salary (if living in a non-metro city)
- Actual rent paid minus 10% of basic salary
It is important to note that the HRA exemption is only applicable if the employee is staying in a rented accommodation. If the employee owns a house and is staying in it, then the HRA exemption cannot be claimed.
Saving Income Tax on House Rent Allowance
The HRA exemption can help taxpayers save a significant amount of income tax. The amount of tax saved depends on the employee’s salary and the amount of rent paid. For instance, if an employee is living in a metro city and receives a monthly HRA of ₹ 20,000, and pays a monthly rent of ₹ 15,000, then the HRA exemption can be calculated as follows:
Since the actual rent paid minus 10% of basic salary is the lowest amount, the House Rent Allowance exemption will be ₹ 13,000. This means that the employee will be able to claim a tax exemption of ₹ 13,000 on their HRA. This can help them save a significant amount of income tax.
Submit Rent Receipts
To procure the HRA exclusion, the worker must provide their employer with documents evidencing the payment of rent. These documents ought to encompass specific minutiae such as the nomenclature of the lessor, the tangible abode’s location, the quantum of rent disbursement, and the tenancy duration.
It is essential to note that the rental receipts must be under the cognomen of the employee or their better half. If the rental receipts are issued under any other kin’s name, then the employee would be ineligible for the HRA exemption.
In order to assert the HRA exemption, the staff member is required to produce verification of the authentic payment of rent. This can be executed by yielding rent receipts, rent concurrence, or any other official documentation manifesting the actual rent paid.
It should be emphasised that the employee must have made the payment of rent through a banking medium to be eligible for the HRA exemption. Payments made in cash are not permissible for the HRA exemption.
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Claim HRA and Home Loan Benefits
Simultaneously obtaining both the HRA exemption and home loan privileges is a conceivable option. In the circumstance where the employee is inhabiting a leased domicile and has availed of a home loan, the employee can claim the HRA exemption and the tax deduction on the interest and principal repayment of the home loan.
Nevertheless, it is imperative to bear in mind that the tax deduction on the home loan can only be asserted if the employee has acquired possession of the house.
Opt for LTA
The Leave Travel Allowance (LTA) is an additional stipend that facilitates employees in saving income tax. This allowance is given to cover travel expenses when the employee is on leave. The LTA exemption can be claimed twice within a block of four years. In the event that the LTA is not availed in a particular block of four years, it can be carried forward to the subsequent block of four years.
The LTA exemption is assessed by computing the amount spent on travel or the LTA amount received from the employer, whichever is lower. It is crucial to take into consideration that the LTA exemption can only be claimed if the employee has actually traveled during their leave. If the employee does not undertake the trip and asserts the LTA exemption, it could be deemed as tax evasion.
Claim Deductions Under Section 80GG
The Income Tax Act’s Section 80GG allows for a tax deduction for rent paid even if an employee’s company does not provide HRA. Depending on whatever is lower, the deduction amount allowed under this clause is capped at either ₹5,000 per month or 25% of the employee’s total income. It’s crucial to remember that an employee cannot claim the HRA exemption and the deduction under Section 80GG at the same time.
Invest in Tax-saving Instruments
In order to curtail income tax expenses, it is imperative to deliberate on allocating funds into tax-saving channels like the Public Provident Fund (PPF), National Savings Certificate (NSC), tax-deferred fixed deposits, and Equity-Linked Saving Scheme (ELSS). These channels extend tax exemptions under Section 80C of the Income Tax Act.
It’s noteworthy to emphasise that the maximum ceiling on tax deductions that are claimable under Section 80C is limited to ₹ 1.5 lakh annually. Additionally, it is critical to effectuate these tax-sparing investments before the culmination of the fiscal year to qualify for the tax exemption.
Conclusion
Reducing tax liability on HRA is an astute approach for Indian taxpayers to save on income tax. To attain the HRA exemption, the employee must grasp the computation method and provide evidence of rent paid. It’s feasible to claim both the HRA exemption and home loan benefits in tandem. Additionally, taxpayers can claim tax deductions for LTA, Section 80GG, and invest in tax-saving tools.
By adopting the aforementioned techniques, Indian taxpayers can significantly curtail their income tax expenses on HRA. However, it’s essential to acknowledge that tax saving shouldn’t be the sole criterion when selecting a rented abode. The employee should also weigh in the location, amenities, and rent before finalising the rented accommodation.
Vakilsearch can help you save income tax on house rent allowance (HRA) under the old tax regime by providing expert advice on the various tax-saving options. We can also assist you in filing your income tax returns and claiming deductions for HRA, ensuring that you take advantage of all available tax benefits. We can help you navigate the complex tax laws and regulations related to HRA, ensuring you stay compliant with all tax regulations.
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