House Rent Allowance and How to Claim It
Updated: Dec 2
Many salaried individuals receive HRA (House Rent Allowance) in their salary which is paid as part of their compensation. However, most people do not know what HRA is. If you’re a salaried employee, you should know that if you rent your home, you may be eligible for an HRA tax exemption. In this blog, we embark on an exploration of this remarkable development and its far-reaching implications for taxpayers, particularly concerning House Rent Allowance (HRA) claims. No longer do you need to navigate through labyrinthine processes or fret over intricate tax calculations. With the harmonious integration of ITR-1 and Form-16, you can now effortlessly attest a copy of Form-16 with your tax return, streamlining the process of claiming HRA and other related benefits.
Table of Contents
What is House Rent Allowance (HRA)?
The HRA, or House Rent Allowance, is a part of most employees' compensation packages. It refers to the sum that a company will pay to one of its employees to cover the expense of living in rental housing. HRA not only assists you in controlling the costs associated with a leased home but also lowers your overall tax burden. Despite being a portion of your compensation, HRA is not taxed. Section 10 (13A) of the Income Tax Act of 1961 exempts a portion of HRA from taxes, subject to specific restrictions. The whole HRA exemption is subtracted from gross income before determining taxable income. This enables a person to reduce their tax liability. However, keep in mind that the HRA received from an employee's company is taxable if the person lives in his or her own house and does not pay rent.
What is HRA in the New Tax Regime?
A new tax regime with much lower tax rates and dramatically fewer chances for tax savings was revealed. The current tax regulation has undergone a number of adjustments in relation to the previous one. But one of the biggest changes is that under the new system, several of the tax exemptions and deductions from the old system won't be accessible. These also include the HRA or House Rent Allowance. As a result, if we consider the new tax regime you will not be able to take advantage of the HRA.
Taxability of HRA
Since HRA is a component of your compensation, it is first regarded as taxable income. On the other hand, Section 10(13A) of the Income Tax Act allows you to claim a partial or whole tax exemption if you live in rented housing. This is commonly referred to as an HRA exemption. Should you not reside in a rented space, this benefit is subject to full taxation. Be aware that if you select the new tax regime, the house rent allowance is not tax deductible.
Who can Avail of a House Rent Allowance?
Salaried Individuals: Salaried individuals are eligible to claim exemptions for House Rent Allowance (HRA) under Income Tax Act Section 10(13A). Since this allowance makes up a sizable portion of a person's pay, it's critical to abide by the company's HRA claim procedures. The amount of allowable exemption is specified in Rule 2A of the Income Tax Rules.
Self-Employed: Self-employed people are not eligible for HRA, although they are under Section 80GG to receive tax deductions for their rental housing.
Tax Deduction on HRA
Exemptions under Section 10 (13A)
For salaried individuals, House Rent Allowance (HRA) forms a significant component of their overall salary package. Thankfully, the Income Tax Act offers a favorable provision for claiming exemptions on HRA. Section 10 (13A) and rule number 2A provide the necessary guidelines for salaried individuals to avail of this benefit. However, it is essential to adhere to the company's policies and norms when claiming HRA to ensure a smooth and valid exemption process. By familiarizing themselves with these provisions and understanding the intricacies involved, salaried individuals can optimize their HRA claims and minimize their tax liabilities effectively.
Eligibility for HRA Claim: Salaried employees are eligible for HRA; it is not applicable to self-employed, freelancers, or those with income from other sources.
Rented Accommodation Requirement: To claim HRA, individuals must reside in rented accommodation; benefits are not available for living in family members' homes.
Rent Payment to Landlord: Eligibility requires rent payment to the landlord; HRA is not applicable if paid to a family member.
Residency Requirement: HRA can be claimed by Indian residents only; non-residents are not eligible.
Minimum Rent Threshold: The rent must exceed 10% of the basic salary to be eligible for HRA; otherwise, it is not applicable.
HRA Calculation: HRA amount is based on the employee's salary structure. To qualify for exemption, the least of the following is considered: actual HRA received, 50% of basic salary in metros, 40% of basic salary in non-metros, or rent paid minus 10% of the basic salary.
Deduction under Section 80GG
Even for individuals who are self-employed, the opportunity to avail of tax deductions and exemptions related to House Rent Allowance (HRA) is within reach. Section 80 GG of the Income Tax Act serves as the key provision for claiming these benefits. This allows self-employed individuals to reduce their taxable income by deducting the eligible HRA amount, thereby lightening their tax burden. Understanding the intricacies of Section 80 GG can help self-employed individuals make the most of this deduction and ensure compliance with tax regulations.
Calculation of HRA Exemption
HRA must constitute a sizable portion of a person's total pay. The amount set aside for HRA is advantageous to employees when used to compute tax deductions for a certain fiscal year. HRA will also help you save money by lowering your taxable taxes.
When determining HRA for tax reasons, the following three clauses are considered:
10 percent of the minimum salary or less should be the real rent.
If you reside in a metro region, you will be paid 50% of the minimum wage, and if you do not, you will be paid 40%.
The HRA code is assigned by the employer.
Illustration:
Ms Sunita is a salaried employee who lives in a leased home and works in Delhi. She pays Rs. 13,000 per month in rent and Rs. 16,000 per month in HRA. Let's now examine the amount of tax deduction she can claim based on this compensation.
The pay schedule for Ms Sunita is displayed in the following table.
The least of the three amounts indicated above (apart from basic pay & HRA) is the actual rent paid, which is less than 10% of basic wage. As a result, Ms. Sunita will receive a Rs 10,500 HRA exemption from her total taxable income. See how:
The least of the following will determine the amount of tax deduction that can be claimed:
(Actual rent paid) - 10% of the base pay = Rs.13,000 – (10% of Rs. 25,000) = Rs. 10,500; or
Actual HRA offered by the employer = Rs. 16,000; or
50% of the base pay = Rs. 12,500, or 50% of Rs.25,000.
To find out if you are exempted from paying taxes and to what extent, use our free HRA calculator. This calculator indicates the portion of your HRA that is subject to taxes, or the amount that is both taxable and exempt from taxes.
Claiming HRA Deduction
When it comes to claiming House Rent Allowance (HRA) during tax filing, there are two approaches available, each catering to different circumstances and preferences. If you prefer the standard method, you can conveniently submit rent-related documents such as rent agreements or receipts to claim HRA. However, this process can become cumbersome for those who do not have these documents readily available. Don't worry if you find yourself without the rent documents at hand. There's still a way to claim the HRA benefit! You can manually submit the eligible HRA amount, which is tax-exempted, even in the absence of rent-related documents. We will guide you through these options, helping you navigate the process with ease, ensuring you make the most of your entitled HRA benefit during tax filing. Let's explore both methods in detail to find the one that suits your needs and situation best.
HRA and Deduction on Home Loan Interest
You can deduct interest from your house loan and claim the HRA exemption. There are two scenarios in which you may be a homeowner and reside in a rented residence.
Both the owned and rented homes are situated in the same city. Here, you must provide solid justification for the deduction claim, such as the reasons you cannot afford to live in your own home. One scenario might be that your home and the office are located really far apart. In this manner, if the relevant requirements are met, you are eligible to receive benefits from both your home loan and HRA.
Both the owned and rented homes are situated in separate cities. If your job requires you to relocate to a different place, you can now claim tax benefits.
When Do You Need a Landlord's PAN?
If you rent a property and make an annual payment exceeding Rs. 1 lakh, it is vital to furnish your landlord's Permanent Account Number (PAN). Failure to do so may result in the forfeiture of your HRA exemption. Landlords lacking a PAN must furnish a self-declaration indicating their PAN non-availability, as per Circular No. 8/2013 dated October 10, 2013. Tenants remitting rent to Non-Resident Indian (NRI) landlords must also remember to withhold TDS (Tax Deducted at Source) at the rate of 30% before making the rental payment.
What If I Don't Receive HRA?
In the event that you pay rent for residential accommodation but do not receive HRA from your employer, you can still avail of a deduction under Section 80GG. To be eligible for this deduction, you must meet the following criteria:
You can be either self-employed or salaried.
You should not have received HRA at any point during the year for which you are claiming the 80GG deduction.
Neither you, your spouse, your minor child, nor the Hindu Undivided Family (HUF) of which you are a member should own any residential property at the location where you presently reside, work, or conduct business or profession.
If you own residential property elsewhere, it should not be considered as self-occupied. Instead, it will be deemed let out to qualify for the 80GG deduction.
How to Claim HRA When Living With Parents?
Consider the scenario of an individual. Let's call her Samiksha, who is employed by an MNC in Bangalore. While her company provides her with HRA, she resides with her parents in their home and not in a rented space. Samiksha can still leverage the HRA benefit by paying rent to her parents. To do so, she should enter a formal rental agreement with her parents and make monthly rental payments. Importantly, Samiksha's parents must declare the rental income received from her in their income tax returns. If their other income falls below the basic exemption limit or is taxed at a lower slab, this approach can lead to overall tax savings for the family.
How to Claim Deduction Under Section 80GG?
To claim the deduction under Section 80GG, you need to satisfy the following criteria:
Self-Employed or Salaried: You can be either self-employed or a salaried individual.
No HRA Received: You must not have received HRA at any time during the relevant financial year for which you are claiming the deduction.
No Ownership of Residential Property: Neither you, your spouse, minor child, nor the Hindu Undivided Family (HUF) of which you are a member should own any residential accommodation at the location where you currently reside, perform official duties, or conduct business or profession
The deduction under Section 80GG is calculated as the least of the following:
Rs. 5,000 per month.
25% of the adjusted total income.
Adjusted total income is derived by deducting certain elements from the total income, including long-term and short-term capital gains, income under specific sections, and deductions under Sections 80C to 80U, except for the 80GG deduction itself. This ensures a fair and balanced approach to the exemption calculation.
80GG Deduction for Additional Property Owners
In case you own any residential property other than the one mentioned above, you should refrain from claiming it as self-occupied. Doing so would entitle you to claim the 80GG deduction. Instead, the other property will be considered as "deemed to be let out," allowing you to avail of the deduction benefits provided by Section 80GG.
Benefits
HRA offers a valuable opportunity to lower your taxable income by deducting the tax-free amount, calculated based on factors like your salary, rent, and city of residence.
By claiming HRA on your income tax return, you can enjoy a higher disposable income, as the tax savings can be allocated for savings or investments.
Integrating HRA claims into your financial planning can optimize your tax burden and provide more financial flexibility for better financial management and planning.
Conclusion
The HRA tax exemption is one of the best legal ways for salaried employees to reduce their tax burden, therefore they should not miss the chance to use it. Make sure to save any relevant supporting material. The ability to minimise taxable income and, consequently, the amount of tax you must pay, is one of the main advantages of the house rent allowance. Now when you know "what is HRA in Salary", Plan your tax-saving investments, including HRAs and other exemptions and deductions, well in advance of the assessment period. Visit TaxBuddy.
FAQ
Q1. Who can claim HRA benefits?
Salaried employees can claim HRA benefits. It is not applicable to self-employed individuals or those with income from other sources.
Q2. What is the eligibility criteria for claiming HRA?
To claim HRA, individuals must reside in rented accommodation and pay rent for the same. Benefits are not available for living in family members' homes.
Q3. Is it permissible to pay rent to a family member and still claim HRA?
No, HRA is not applicable if rent is paid to a family member; it must be paid to the landlord.
Q4. Who is eligible to claim HRA based on residency status?
HRA can be claimed by Indian residents only; non-residents are not eligible.
Q5. Is there a minimum rent threshold for claiming HRA?
Yes, the rent must exceed 10% of the basic salary to be eligible for HRA.
Q6. Even if I own a home, can I still deduct HRA from my taxes?
If you match the requirements outlined above in the article, you are still eligible to apply for HRA even if you own a home. For instance, let's say you rent a flat in Kolkata but own a home in Mumbai. In this scenario, you are eligible to claim a tax deduction on the HRA you got as part of your income.
Q7. Can I deduct the interest on my house loan and my HRA at the same time?
Ans. Yes, you are allowed to deduct interest paid on your house loan under Section 24(b) and HRA under Section 10(13A) at the same time. For instance, let's say you now rent a home but have taken out a mortgage on a house that is still being built. In this situation, you are eligible to deduct HRA from your taxes to reduce your overall taxable income.
Q8. Do members of the armed forces receive a different HRA rate?
Ans. Yes, according to the seventh CPC's guidelines, there is a special HRA rate for members of the armed services.
Q9. What can I provide as proof that I paid rent throughout the year?
Ans. The receipts for rent payments made throughout the year must be kept. The identification document must be shown when submitting an income tax return (ITR). You will be needed to provide your lease agreement and the bank statement that reflects the rent payments if a rent receipt is not available.
Q10. What happens if I do not submit proof for HRA exemption to the employer or do not claim HRA deduction in ITR?
You can claim the HRA deduction when filing your ITR if you failed to provide your employer with a copy of the rental agreement or rent receipts at the time of proof submission. If, during filing your return, you fail to include the HRA, you have until the end of the assessment year or December 31st, whichever comes first, to file a revised return and fix the problem.
Q11. If I live with my parents, are I still eligible to get HRA?
Ans. Yes, even if you reside in your parent's home, you are still eligible to claim HRA as a tax deduction. You must enter into a rental agreement with your parents and pay them rent regularly to be eligible for the deduction. You can reduce your tax liability by presenting these rental invoices in your name. But make sure you meet the prerequisites for receiving HRA as one of your compensation components, as listed above.
Q12. Can I claim both 80GG and HRA?
No, under Section 80GG, a person who pays rent but does not receive a house rent allowance may deduct expenses. In order to qualify for this deduction, the individual, their spouse, or their children must not own a home in the area where they work, live, or frequent.
Q13. What is the HRA maximum limit?
As per Section 10(13A), an employee is eligible to deduct HRA up to the real amount of HRA that they have received from their employer.
Q14. What is an HRA certificate?
When a government employee requests HRA due to their inability to obtain a government accommodation in accordance with the established policy, they will issue an HRA certificate.
Q15. How to claim HRA in the Income Tax Return (ITR)?
The HRA component's taxable percentage must be included in "Salary as per Section 17(1)." Under the heading "allowances to the extent exempt u/s 10," an exempt element of the HRA component must be added; make sure it is included in salary income u/s 17 (1), 17 (2), and 17 (3).
Q16. How to claim HRA if not mentioned in Form 16?
Should HRA be absent from Form 16, it indicates that your employer has not furnished a distinct HRA component. HRA under section 10(13A) may be claimed in cases where the employer contributes a separate amount for HRA. You may make a claim for rent paid under Section 80GG in its absence.
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