HRA Exemption (House Rent Allowance)

22 Sep 2022

What is HRA?

Hra means House Rent Allowance, it is one of the primary components of the salary of a person. This allowance is given by employers to their employees to meet the accommodation expenses of renting a place for residential purposes.

The employees get this allowance exempted from their gross salary which eventually helps to reduce their total tax liability. But the calculation of HRA is not as simple as it spells.

How is HRA calculated?

For calculating HRA we need certain details such as follows:

Basic salary

HRA received from the employer

Actual Rent paid

Residing city (metro or non-metro)

The formula for calculating HRA.

The exempted Hra will be the least of the following:

1. Actual rent paid minus 10% of basic salary

2. Hra offered by the employer

3. 50% of Basic salary + DA residing in metro cities & 40% residing in non-metro cities

Let us understand with an example:

Mr. Ram who works as a salaried employee stays in Mumbai on rent. He is paying Rs.15000 rent per month, and his basic salary is Rs.40000 p.m and Hra received by his employer is Rs.20000.

1. Actual rent minus 10% of basic salary + DA : 15000 - 4000= 11000

2. HRA offered by the employer: 20000

3. 50% of 40000: 20000

The exempted HRA will be Rs.11000 which is the least of the above 3 steps, and the remaining will be taxable HRA.

Important rules to remember for claiming HRA exemption.

Rent receipts are required as proof to claim the HRA benefits

In case you are paying rent more than 1lakh annually, then the landlord's Pan is required to be submitted.

Hra is meant to benefit from the rent expenses, so you cannot claim the benefit if you are staying in a self-owned house.

You cannot pay rent to your spouse and claim the HRA benefits.

You can claim the HRA exemption if staying with your parents and paying them the rent, you have to just show relevant receipts to claim the benefits. Your parents need to add the same rent to their income while filing their ITR.

HRA differs from one city to another. If you live in metro cities such as Delhi, Mumbai, Kolkata, or Chennai you can claim 50% of the HRA deduction and if you live elsewhere then you can claim 40% as a tax deduction.

Only salaried employees can claim the HRA deduction, not the others such as professionals and freelancers. They can claim the rent under section 80GG

Not getting HRA component in salary. Can we claim HRA then?

In many cases, a person is staying on rent but in their salary component, HRA is not included so in such a situation you cannot claim the HRA exemption while filing the ITR.

In such a situation, you can claim the rent deduction under section 80GG. This section was included by the IT department to benefit those who cannot claim HRA and also those who are self-employed.

How to claim 80GG?

To claim a deduction under section 80GG of Income-tax, the lowest of the following should be considered.

  1. Rs.5000 per month.

  1. 25% of your Gross total income

  1. (Actual rent paid) - 10% of total income.

Can we claim HRA if living with parents?

If you are staying with your parents, then you can claim the HRA deduction. The thing required to be done is you need to enter into a rental agreement with your parents and pay them the rent per month as proof. If such a condition is met you can easily claim the deduction. However, your parents will have to show the rent paid by you on their ITR.

Can we claim a home loan deduction as well as HRA?

HRA benefit is applicable as long as you are paying rent for accommodation. Also, you can claim benefits on your home loan as well as HRA in case your home is rented out and you are staying in a rented place. However, in such a case you need to disclose the rental income earned by renting your property on which the suitable tax will be applicable.

Chetan Kori