House Rent Allowance or HRA is an important salary component paid by the employer to employees for meeting the accommodation requirements. HRA is applicable to both salaried as well as self-employed individuals. It is basically an amount paid to compensate for the rent paid by an employee to live in the place of employment. While deduction for house rent allowance under Section 10 (13A) of the Income Tax Act is allowed, HRA may be fully or partially taxable. The HRA deduction calculation depends on your salary, the HRA received, the actual rent that you pay, and the place of your employment and residence. Let us understand HRA in detail and other components related to it including claim rules, tax exemption, calculation, documentation, and more.
Basis on which HRA is decided
Primarily, HRA is decided on the basis of the salary. However, there are some other factors that also affect HRA, such as the city in which the employee resides. In case the individual resides in a metro city, then he/she is entitled to an HRA equal to 50% of the salary. For cities other than a metro, the entitlement is 40% of the salary. In order to calculate the HRA, the salary is defined as the sum of the basic salary, dearness allowances, and any other commissions. If an employee does not receive a commission or a dearness allowance, then the HRA will be around 40% – 50% of his/her basic salary.
How is HRA Calculated?
The amount allotted for HRA proves to be beneficial for an employee as it is calculated for tax deductions for a particular financial year. HRA also helps in reducing the taxable income that you are liable to pay. The tax benefits associated with HRA are only applicable for those salaried individuals who stay in rental accommodation. If an employee stays in his or her own house, he or she is not eligible to claim the amount for tax deductions. The actual HRA offered, in all possible situations will be the lowest of the following three provisions:
- The actual rent that is paid should be less than 10% of the basic salary
- In case you are staying in a metro, 50% of the basic salary and 40% if you live in a non-metro city
- The actual amount received as the HRA from the employer
It is to be noted that the least of the above-mentioned amount will be considered for tax deduction from HRA. Let us understand the calculation of HRA with the help of an example: Suppose Mr. X resides in Delhi in rented accommodation, paying a rent of Rs. 10,000 per month, which amounts to Rs. 1.2 lakh annually. The table below shows his monthly earnings:
|Basic Salary||Rs. 30,000|
|Conveyance Allowance||Rs. 2,000|
|Special Allowance||Rs. 3,000|
|Leave Travel Allowance||Rs. 5,000|
|Total Earnings||Rs. 53,000|
*There is a PF contribution of Rs. 2,000 and professional tax of Rs.200 deducted from his salary each month. In the above example, the tax-exempt part of Mr. X’s HRA would be the lowest of the following, considering his earnings on an annual basis:
|Actual HRA component of salary||Rs. 13,000 X 12= Rs. 1.5 lakh|
|50% of his basic salary, as he stays in Delhi||50% x Rs. 3,000 x 12= Rs. 1.8 lakh|
|Actual rent paid minus 10% of basic salary||(Rs. 10,000 x 12) – (10% x Rs. 30,000 x 12)= Rs. 84,000|
Since Rs.84,000 is the lowest value above, this is the amount of tax-exemption Mr. X can receive on HRA. The rest of the HRA amount received will be taxed as per his income tax slab.
Claim Rules for HRA
The rules that are applicable for HRA claims are as follows:
Rules Applicable for HRA Claims
Is HRA taxable?
The answer is both yes and no. Essentially, HRA is exempted under section 10(13A) of the Income Tax Act. However, the amount of exemption is determined to be the minimum of three amounts, calculated as per the rules explained above.
HRA Tax Exemption
Salaried employees are eligible for HRA exemption for the income tax that they are required to pay each financial year. As per the Income Tax Act, for the calculation of house rent allowance, the least of the following three components is taken into consideration –
- Actual HRA received by the employer
- 50% or 40% of the basic salary depending upon a metro or a non-metro location, respectively
- Rent paid minus 10% of basic salary
Where basic salary refers to basic + DA + commission on the sale at a fixed rate.
How to Avail Tax Benefits on your Home Loan as well as HRA?
Tax benefits on HRA are applicable as long as you are paying rent for your accommodation. However, you can avail tax benefits on your home loan as well as HRA tax benefits in case your own home is rented out and you yourself are staying at a rented place. However, in such a case you need to disclose your rental income or income from the property from which suitable tax will be deducted by the government. If the owned and the rented property are in the same city then tax exemption on both cannot be claimed. However, if any individual is able to prove that the owned property is quite far from the place of work and hence the rented accommodation has been availed, then tax exemption on both HRA as well as housing loan can be claimed.
HRA for Self-Employed
The self-employed can also claim for deductions and HRA tax exemptions, towards the House Rent Allowance (HRA). They can claim the benefits under Section 80 GG. This section can also be used to claim the HRA tax exemptions by the salaried employees when they do not receive any HRA.
Documents Required to claim HRA related tax exemptions
The main document that has to be provided at the time of the claiming tax exemption for HRA are rent receipts to rental agreement. Being a taxpayer, you will be eligible for this exemption even if you are paying rent to your parents. As the taxpayer, you will have to submit your rent receipts in order to avail tax exemption on HRA. The PAN details of the landlord/landlady are required to be provided as well in the cases where the annual rent of the housing unit exceeds the mark of Rs.1 lakh. If the landlord/landlady does not have a PAN card, he or she can provide a self-declaration quoting the same.
Frequently Asked Questions (FAQs)
How can I claim HRA exemption?
You can claim HRA exemption by submitting proof of rent receipts to your employer. Alternatively, you can claim the HRA exemption yourself while filing your income tax return.
What is the tax liability in case my entire HRA is not tax-exempt?
The balance HRA which is not tax-exempt is payable to the employee after deducting tax at the applicable slab rates.
HRA comes under which section of income tax?
House rent allowance received by an employee is partially or wholly exempt as per the conditions laid out in section 10(13A).
How to claim HRA if not mentioned in form-16?
If HRA is not mentioned in form 16 it means your employer has not provided a separate component of HRA. HRA u/s 10 (13A) can be claimed when a separate component towards HRA is given by the employer. In absence of it, you can claim for rent paid under section 80GG.
Is it possible to claim HRA if I live in my own house?
No. If you live in your own house, then you cannot claim HRA.
Can I claim HRA for two houses?
Unfortunately, no. The HRA benefits are available for only one house in the concerned city of the workplace.
Does HRA include electricity charges?
No, electricity charges cannot be claimed as HRA. The electricity charges are not considered as the landlord’s earning since it is paid to the electricity provider.
Will my HRA vary if I shift from a normal city to a metropolitan city?
Yes. HRA is dependent upon the city in which you stay. Moving from a non-metro city to a metro would change your HRA from 40% to 50% of your basic salary.
What if the employer refuses to allow the HRA Tax Benefit?
You need not worry in case your employer refuses to allow tax benefits. You can claim the same while filing your tax return and can receive the exempted amount as refund of excess TDS.