As a part of the salary package, in accordance with the terms and conditions of employment, usually an employee receives a House Rent allowance (HRA) from the employer. HRA is provided to meet the cost of a rented accommodation availed by the employee for his/her stay to come to work. The Income Tax Act permits a deduction with regard to HRA paid to employees. The HRA exemption is covered under Section 10(13A) of Income Tax Act. It may be kindly noted that the entire HRA paid may be fully tax deductible. In general, HRA is an allowance that is subjected to income tax.
Rules for claiming HRA Exemption
An employee can claim HRA exemption under Section 10(13A) of the Income Tax Act if he/she stays in a rented accommodation and is in receipt of HRA from his/her employer. An employee must actually pay the rent for the accommodation availed in order to claim the deduction.
The employee should not own the rented premises. In case the employee stays in own house (or spouse’s house), no deduction is allowed and the entire HRA amount received is taxable. As long as the employee stays in the rented accommodation and the rented premises are not owned by the employee, the HRA exemption will be available to the employee up to the least of the following three options below:
- Actual HRA received from your employer
- Actual rent paid minus 10% of salary (basic + DA)
- 50% of salary (basic + DA), if the employee lives in a metro or 40% of salary (basic + DA), if the employee lives in a non-metro
The least of the above can be claimed as income tax exemption on HRA and the rest in fully taxable.
Example calculation of exemption/deduction of HRA
Assume Rohit has received the following amounts during the previous year and lives in Delhi (metro) in rented accommodation paying a rent of Rs.3000 p.m
- Basic Salary – Rs. (6000×12) – Rs. 72,000/-
- Dearness Allowance (DA) – Rs. (2000×12) – Rs. 24000/-
- House Rent Allowance (H.R.A.) – Rs. (4000×12) – Rs. 48000/-
- Actual Rent Paid – Rs. (3000×12) – Rs. 36000/-
Calculation
The minimum of the following amount shall be exempt
- Actual HRA received (4000*12) – Rs. 48000/-
- Rent Paid in excess of 10% of salary (36000-9600) – Rs. 26200/-
- 50% of Salary – Rs. 48000/-
Therefore, Rs. 26200/- shall be exempt and the balance Rs. 21800/- shall be included in the gross salary.
Frequently Asked Questions (FAQs):
1. Can a self employed professional claim HRA exemption?
HRA exemption is allowed for salaried people under Section 10 (13A) of Income Tax Act, 1961. Self-employed professionals, on the other hand, cannot claim HRA exemption, as they are not salaried individuals. However, they are allowed to claim exemption on the incurred house rent expenses under new section 80GG, but it is also subject to certain laid out conditions.
2. What are the considerations involved calculating HRA exemption for the salaried individual?
When you are calculating HRA exemption, you take into consideration the following three aspects have to be considered.
- Actual HRA received from your employer
- Actual rent paid minus 10% of salary (basic + DA)
- 50% of salary (basic + DA), if the employee lives in a metro or 40% of salary (basic + DA), if the employee lives in a non-metro
The least of the above can be claimed as income tax exemption on HRA and the rest in fully taxable.
3. Can I pay rent to my spouse or my parents to avail HRA exemption?
You may pay rent to your parents, provided they pay taxes for same amount which is treated as income to them,
On the other hand, paying rent to your spouse does not allow for tax exemptions. In view of the relationship, you are expected to take up residence together and hence under tax laws, such a transaction does not bear merit.
4. Do I need to submit any documentary proof for my HRA claim?
You are required to submit proof of rent payments through rental receipts. You are only required to submit two receipts (Say April 2016 & March 2017 – one for the beginning of the year and the other towards the end of the year). The receipts should have a one rupee revenue stamp affixed with the signature of the landlord to whom you have paid rent. The receipt should carry other details like the address of the rented residence, amount paid, name of the landlord, etc.
5. Can I simultaneously avail tax benefits on HRA and my home loan?
The tax benefits for HRA and home loan are entirely different and belong to different sections with no relation to each other. As long as your accommodation is rented, you are eligible to claim tax benefits on the HRA received as part of your salary, while also availing tax exemption on the home loan taken. This is possible if your own house is rented out to someone or you work from a different city etc.
