If you’re a salaried individual in India who rents a house, you may be eligible for House Rent Allowance (HRA) and HRA exemption. These can help you reduce your taxable income and ultimately, pay less in taxes. However, understanding these allowances and exemptions can be complex if you don’t have guidance from a financial expert. In this article, we will explain what HRA and HRA exemption are, how to calculate them, and how you can maximize their tax benefits.
Understanding House Rent Allowance (HRA) and HRA Exemption
HRA is an allowance given by your employer as a part of your salary package, to help you pay for your rental accommodation. If you live in a rented house and receive HRA, you may be eligible for tax benefits under Section 10(13A) of the Income Tax Act, 1961. The HRA exemption is the amount of HRA that is not taxable. It is calculated based on certain conditions that we will explain shortly.
What is House Rent Allowance (HRA)?
As mentioned earlier, HRA is an allowance given by your employer to help you pay for your rented accommodation. This allowance is a part of your salary and is paid in addition to your basic salary. The amount of HRA you receive varies based on your salary package and the city where you live.
It is important to note that the HRA amount you receive is not the same as your rent. Your employer may use a formula to calculate your HRA, which takes into account your basic salary, dearness allowance, and the city where you live. The formula may vary from one company to another, but it is usually a percentage of your basic salary.
For example, if your basic salary is Rs. 50,000 per month and you live in a metro city, your employer may give you an HRA of 50% of your basic salary, which would be Rs. 25,000 per month.
What is HRA Exemption?
HRA exemption is the portion of HRA that is not taxable. You can claim this exemption on the condition that you are paying rent for a residential accommodation and the rent is a part of your salary package. The exemption amount is determined based on specific conditions, which we will discuss in the following sections.
The HRA exemption is calculated as the minimum of the following three amounts:
- The actual amount of HRA received from your employer
- The amount of rent paid minus 10% of your basic salary
- 50% of your basic salary if you live in a metro city or 40% of your basic salary if you live in a non-metro city
For example, if your basic salary is Rs. 50,000 per month and you live in a metro city, your employer may give you an HRA of Rs. 25,000 per month. If you pay a rent of Rs. 20,000 per month, your HRA exemption would be Rs. 15,000 per month, which is the minimum of the three amounts calculated above.
Eligibility Criteria for HRA and HRA Exemption
To be eligible for HRA, you must be a salaried individual who is renting a house. However, if you are living in your own house or in the house of a relative, you will not be eligible for HRA. Additionally, if you are paying rent to someone who is a relative or spouse, you will not be eligible for HRA exemption.
It is important to note that if you are living in a rented house but not receiving HRA from your employer, you will not be eligible for HRA exemption. The rent paid by you will not be considered for tax benefits.
Furthermore, if you have a home loan and are paying both EMI and rent, you can claim tax benefits on both. You can claim tax benefits on the EMI paid for your home loan under Section 80C of the Income Tax Act, and on the rent paid for your rented accommodation under Section 10(13A) of the Income Tax Act.
In conclusion, understanding HRA and HRA exemption is important for salaried individuals who are renting a house. By claiming HRA exemption, you can reduce your taxable income and save on taxes. However, it is important to ensure that you meet the eligibility criteria and provide the necessary documents to claim this exemption.
Calculating House Rent Allowance (HRA)
Calculating HRA can seem complicated, but it is actually quite straightforward. The components of HRA calculation are:
Components of HRA Calculation
- The actual rent paid by you
- HRA amount received by you as a part of your salary package
- The city where you reside
- Your basic salary
HRA Calculation Formula
The HRA calculation formula is:
Minimum of the following three options –
- Actual HRA received from the employer
- 50% of (basic salary + Dearness Allowance) for those residing in metro cities or 40% of (basic salary + Dearness Allowance) for those residing in non-metro cities
- Actual rent paid in excess of 10% of basic salary
Examples of HRA Calculation
Let us consider two examples to understand how HRA calculation works:
Example 1:
- Actual HRA received from the employer: Rs. 20,000 per month
- Actual rent paid by the individual: Rs. 15,000 per month
- Basic salary: Rs. 50,000 per month
- Living in Mumbai (metro city)
In this case, the HRA exemption would be calculated as the minimum of the three options:
- Rs. 20,000 (actual HRA received from the employer)
- Rs. 25,000 (50% of basic salary + Dearness Allowance) (since living in a metro city)
- Rs. 4,500 (rent paid in excess of 10% of basic salary)
Therefore, the HRA exemption would be Rs. 4,500, and the taxable portion of the HRA would be Rs. 15,500 (Rs. 20,000 – Rs. 4,500).
Example 2:
- Actual HRA received from the employer: Rs. 20,000 per month
- Actual rent paid by the individual: Rs. 10,000 per month
- Basic salary: Rs. 70,000 per month
- Living in Chennai (non-metro city)
In this case, the HRA exemption would be calculated as the minimum of the three options:
- Rs. 20,000 (actual HRA received from the employer)
- Rs. 28,000 (40% of basic salary + Dearness Allowance) (since living in a non-metro city)
- Rs. 3,000 (rent paid in excess of 10% of basic salary)
Therefore, the HRA exemption would be Rs. 3,000, and the taxable portion of the HRA would be Rs. 17,000 (Rs. 20,000 – Rs. 3,000).
Claiming HRA Exemption
Now that you know how to calculate HRA, let us understand how to claim HRA exemption. There are specific conditions that you must meet to be eligible for this exemption, such as:
Conditions for Claiming HRA Exemption
- You must receive HRA as a part of your salary package
- You must be living in a rented house
- The rent paid must be a reasonable amount
- You cannot be claiming any tax benefits towards a home loan taken for the same house where you are paying rent
Documentation Required for HRA Exemption
To claim HRA exemption, you will need to submit the following documents:
- Rent agreement between you and your landlord
- Receipt of rent paid to the landlord
- PAN card of landlord (if applicable)
- HRA calculation sheet
How to Claim HRA Exemption in Income Tax Returns
You can claim HRA exemption while filing your income tax returns. You will need to fill in the details of the HRA received, the rent paid, and the city where you are residing. You will also need to provide the details of the landlord, such as their name and PAN card number. Ensure that all the calculations are accurately reflected in the tax return form to avoid any discrepancies.
Maximizing Tax Benefits through HRA and HRA Exemption
Now that you know about HRA and HRA exemption, let’s see how to maximize the tax benefits associated with them.
Choosing the Right Rent Amount
One of the ways to maximize HRA exemption is by choosing the right rent amount. The rent paid should be reasonable, and should not exceed 10% of your basic salary. Paying an unrealistically high rent amount may lead to suspicion by the income tax authorities, and may result in disqualification from claiming HRA exemption.
Optimal Utilization of HRA and HRA Exemption
Another way to maximize HRA and HRA exemption is by optimizing the utilization of the allowance. You can use the amount received towards paying rent, and claim the exemption for the same. If you pay rent to parents or relatives, you can also claim HRA exemption on the rent paid, provided they have declared the rent as their income and are paying tax on it.
Tax Planning Tips for Salaried Individuals
Lastly, it is essential to plan your taxes in advance to make the most of the tax benefits available. You can invest your savings in tax-saving instruments like ELSS, PPF, or NPS to reduce your taxable income. Also, keep track of the different tax benefits available and ensure that you are claiming them correctly to avoid any penalties.
Conclusion
House Rent Allowance (HRA) and HRA exemption can help you reduce your taxable income and ultimately pay less in taxes. While these benefits may seem complicated, understanding them can lead to significant tax savings. Remember to plan your taxes in advance, choose the right rent amount, and claim HRA exemption accurately while filing your income tax returns. With these tips, you can maximize the tax benefits associated with HRA and HRA exemption.
