What is HRA? - It’s Time to Claim HRA Tax Exemption
Updated: Dec 15, 2023
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 is HRA in salary.
Table of Content
If you’re a salaried employee, you should know that if you rent your home, you may be eligible for an HRA tax exemption. Let's examine "what is HRA," how to calculate it, and let's also answer some often-asked questions in this article.
HRA - House Rent Allowance
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. Now that you've understood "what is HRA in Salary", let's look at its new regime.
What Is HRA For A Self-Employed Person?
Self-employed persons can also take advantage of tax exemption and deductions towards house rent allowances. If you're the one - You will be eligible for an HRA exemption under Section 80GG regardless of whether you are a paid employee or a self-employed worker.
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.
Tax Deduction On HRA: Eligibility
Through this article of "What is HRA", it's time to know about the tax deduction on HRA. The least of the following is the amount of tax deductions that could be claimed over HRA:
Actual rent paid less than 10% of the basic pay.
Actual HRA provided by the employer.
50% of the salary when the residential property is located in Mumbai, Delhi, Chennai, or Kolkata; 40% of the salary when the residential property is located elsewhere are all acceptable options.
Only salaried individuals who reside in a rental property and have an HRA element of their pay structure are eligible for this tax advantage. The benefit is not available to self-employed employees. Self-employed people can take advantage of tax breaks and deductions for House Rent Allowance (HRA). They can utilise Section 80 GG to obtain these benefits.
The Calculation For Understanding HRA
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.
Let’s understand the calculation with an example:
NOTE: To calculate HRA, the term "salary" refers to the total of the base pay, dearness allowance (DA), and any additional commissions, if any.
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.
Salary Component | Amount (Rs.) |
Basic | 25,000 |
HRA | 16,000 |
Medical Allowances | 2,000 |
Conveyance | 1,500 |
Special Allowances | 2,100 |
Total | 46,600 |
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.
HRA for Salaried Individuals
Section 10 (13A) of the Income Tax Act allows salaried individuals to claim exemptions for House Rent Allowance (HRA). Given that HRA constitutes a substantial component of an individual's salary, it is imperative to adhere to the company's policies regarding using HRA.
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?
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.
Remember The Important Factors When Claiming HRA Deductions
1 . LandLord's Consideration
If you pay more than Rs 1 lakh in annual rent, the landlord's PAN is necessary to qualify for HRA exemption. A signed statement should be adequate if the landlord does not have a PAN. You might not be able to claim the tax deduction, though, if none of these are available.
2. Location
Depending on the city, the HRA (House Rent Allowance) varies. You can deduct up to 50% of your HRA from your taxes if you live in a metropolis like Mumbai, Delhi, Chennai, or Kolkata. If you live anywhere else, you can deduct up to 40% of your HRA.
3. Living Status
You cannot utilise HRA if you reside in a home that you own because it is intended to cover the expense of your rental housing.
If you are residing along with your parents and have a rent statement in their name, you may be eligible for an HRA exemption. However, when it comes time to complete their income tax forms, your parents must include the same rent as part of their income.
Rent cannot be paid to your partner and claim deduction on it.
Calculate Your HRA
If you want to calculate your exempted house rent allowances and taxable house rent allowances, you can easily calculate it with HRA Calculator on Income Tax India official website. Here, you just need to add the Basic Salary, DA (Dearness Allowance), commission and there you go! Click to calculate. You will get a calculator like this:
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.
Frequently Asked Questions
Q1. 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.
Q2. 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.
Q3. 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.
Q4. 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.
Q5. 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.
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