Exemptions on House Rent
The exemption on house rent, or the House Rent Allowance (HRA) is generally structured into the salaries of the majority of salaried employees residing in India. This doesn’t mean the amount one pays for rent is not taxed at all, but merely that, unlike with the actual salary of an employee, the HRA is not completely taxable, subject to certain conditions outlined under Section 10 (13A) of the Income-tax Act of 1961.
The sum mentioned under the exemption allocated for HRA is invariably deductible from a salaried individual’s total income before arriving at a taxable income. This helps employees save on their taxes. However, it is important to remember that HRA, if received from an employer, is completely taxable if a salaried individual resides in an own domicile or if a salaried individual is able to reside in a domicile without paying any rent, such as in their parents’ residence or with a family member who already claims HRA on that same address.
Benefit of HRA
HRA is a tax benefit that is available specifically to salaried individuals for whom it is an actual component of the salary structure, and is available to them only if they can prove that they are actually staying in a rented accommodation. Also, this deduction is available only to salaried employees, and self-employed professionals will not be able to avail this deduction when filing their returns.
Checklist for claiming HRA
The applicable rules for claims under HRA are,
- The allocated HRA cannot exceed 50% of the basic salary.
- As a salaried employee, one cannot claim exemption on the complete rental amount they pay every month. The exemption would need to be based on one of the options mentioned below, whichever is the lowest:
- a. The actual amount allotted by the employer as the HRA.
- b. Actual rent paid with 10% of the basic salary subtracted.
- c. 50% of the basic salary if the employee is staying in a city that is officially classified as a metropolitan city or 40% for a non-metropolitan city.
- One can also avail the tax benefits of an HRA while taking out a home loan.
- In case the assessee stays with their parents or family members, they are legally allowed to pay them a rent as long as they can prove it for an HRA claim. However, this facility cannot be extended to one’s spouse for a tax exemption.
- In case one’s landlord is an NRI, they must deduct 30% tax from the rental amount that they would need to declare.
Please note: for purposes of the calculation, what is counted as the salary is what is defined under the structure as the “basic salary.” If the “Dearness Allowance” (DA) (if it forms a part of one’s retirement benefits) and the “commission received on the basis of sales turnover” are applicable, then they too are to be added into the structure so as to compute the lowest HRA exemption available, and can only be claimed by a salaried person for the duration of the period during which they occupy a rented accommodation.
Calculation of HRA
Raj lives and works in Chennai, a metropolitan city, and lives in rented accommodation for which he pays a monthly rent of Rs. 10,000. His basic salary is Rs. 20,000 a month along with a DA of Rs. 1000, which forms a part of the salary. His HRA is Rs. 4000 a month.
| Sl.No | Particulars | Amount (in Rs) | Amount (in Rs) |
|---|---|---|---|
| 1 | Actual HRA received | 50,000 | |
| 2 | Rent paid (10000 p.m. * 12 months) minus(-) 10% of {(200 00p.m.*12) + (1000p.m.*12)} i.e.10% of Basic + DA | 1,20,000 -14,400 | 1,05,600 |
| 3 | 50% of {(20,000p.m.*12) + (1000p.m.*12)} (50% since Raj lives in Chennai) | 1,26,000 | |
| 4 | Exempt HRA, which is the lowest between 1, 2, and 3 | 50,000 |
Therefore, in the example given above, the entire HRA component of Raj’s salary is exempt from income tax.
Documents required when claiming HRA
Exemption of HRA can only be availed upon the submission of rent receipts, accompanied by the rental agreement the assessee has entered into with their landlord.
If the annual rental on one’s accommodation exceeds Rs.1 lakh, then presenting the landlord's Personal Account Number (PAN) card is mandatory. In cases where the landlord does not possess a PAN card, they would need to provide a self-declaration.
FAQs on Exemptions on House Rent
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