House Rent Allowance or HRA forms a salary component of most of the salaried individuals. For those living in rented accommodation it can help them save tax. Are you wondering how you can save tax through HRA deduction? Read on to understand all the key aspects of HRA and how you can claim tax benefits from the same.
Note: Tax exemption of house rent allowance is not available in case you opt for the New Tax Regime from FY 2020-21 (AY 2021-22). HRA exemption is available only under the Old Tax Regime.
What is HRA
The full form of HRA is House Rent Allowance, which often forms a key taxable component of a salary slip. It refers to the amount paid by an employer to his/her employee to meet the cost of living in a rented accommodation.
HRA not only helps you manage the expenses incurred on a rented house, but also helps you save on your total tax outgo. Let us understand the eligibility criteria to claim HRA deduction and its calculation in the following sections.
Who Can Claim Tax Deduction on HRA – Eligibility Criteria
A part of HRA can be claimed as a tax deduction according to Section 10(13A) of the Income Tax Act, if the following eligibility criteria are met:
- You should be a salaried individual.
- You should receive HRA as a salary component.
- You should live in a rented house.
- You should be actually paying house rent, i.e., the rent receipts should be issued in your name.
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How is House Rent Allowance (HRA) Calculated
The amount of tax deduction that can be claimed over HRA is the least of the following:
- Actual rent paid minus 10% of the basic salary, or
- Actual HRA offered by the employer, or
- 50% of salary when residential house is situated in Mumbai, Delhi, Chennai or Kolkata; 40% of salary when residential house is situated elsewhere
NOTE: Salary refers to the sum of basic salary, dearness allowance (DA) and any other commissions, if applicable for the purpose of HRA calculation.
Mr. A, who lives in a rented house, works as a salaried employee in Delhi. He pays a monthly rent of Rs. 12,000 and receives a monthly HRA of Rs. 15,000. Now, let us understand how much tax deduction he can claim on the basis of this allowance.
The following table shows the salary structure for Mr. A.
|Salary Component||Amount (Rs.)|
The amount of tax deduction that can be claimed will be the least of the following:
- (Actual rent paid) – (10% of the basic salary) = Rs. 12,000 – (10% of Rs. 23,000) = Rs. 9,700; or
- Actual HRA offered by the employer = Rs. 15,000; or
- 50% of the basic salary = 50% of Rs. 23,000 = Rs. 11,500.
The least of the above three is the actual amount paid as rent minus 10% of the basic salary. Hence, Mr. A will get an HRA exemption of Rs 9,700 on his total taxable income.
NOTE: You can use Income Tax Department’s HRA calculator to know the amount of claimable deduction u/s 10(13A) of the IT Act.
Important Points to Remember for Claiming HRA Deduction
- In case you are paying an annual rent of more than Rs 1 Lakh, the landlord’s PAN will be required to claim HRA exemption. If the landlord does not have a PAN in his name, a signed declaration should be sufficient. But if none of these are available, you may lose out on the tax deduction.
- The House Rent Allowance (HRA) differs from one city to another. If you live in a metro city, namely Mumbai, Delhi, Chennai or Kolkata, you can claim up to 50% of HRA as tax deduction, while if you live elsewhere, you can claim up to 40% of HRA as tax deduction.
- Since HRA is meant to provide for the cost of your rented accommodation, you cannot claim it when living in a self-owned house.
- If you are staying with your parents and produce a rent receipt in the name of your parents, you can claim HRA exemption. However, your parents need to add the same rent to their income at the time of filing income tax returns.
- You cannot pay rent to your spouse and claim HRA deduction on it.
Section 80GG – How to Save Tax If You Don’t Receive HRA
How to save tax when you live in a rented accommodation, but don’t receive HRA as a salary component? Or what if, you are a self employed individual and hence don’t receive a salary at all? Worry not! You can still claim tax deduction under Section 80GG of the Income Tax Act.
The maximum amount of deduction that can be claimed under Section 80GG of the Income Tax Act corresponds to the least of the following:
- Rs. 5,000 per month (Rs. 60,000 per year); or
- 25% of your gross total income; or
- (Actual rent paid) – 10% of total income
Read more about Section 80GG to know what are the eligibility criteria and procedure to claim deduction under this section.
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Frequently Asked Questions (FAQs)
Q1. Can I simultaneously claim both HRA and home loan interest as tax deductions?
Yes, you can simultaneously claim both HRA u/s 10(13A) and interest paid on home loan u/s 24(b) as income tax deductions. For example, you have taken a home loan for a under-construction property, and presently live in a rented house. In this case, you can claim both home loan interest and HRA as tax deductions to lower your total taxable income.
Q2. Can I claim HRA as a tax deduction, even if I own a house?
Yes, you can claim HRA even if you own a house, provided you meet the eligibility criteria listed above. For example, you own a house in Kolkata but live in a rented apartment in Delhi. In this case you can claim tax deduction on the amount of HRA received as a salary component.
Q3. Can I claim HRA if I am living in my parent’s house?
Yes, you can claim HRA as a tax deduction even if you live in your parent’s house. To claim the deduction, you will have to enter in a rental agreement with your parents and pay them rent every month. By showing these rental receipts in your name, you will be able to save on your tax outgo. However, ensure that you fulfil the eligibility criteria mentioned above and receive HRA as one of the salary components.
Q4. Is there a separate HRA rate for armed forces personnel?
Yes, there exists a separate HRA rate for armed forces personnel as per the seventh CPC recommendations. Click here to read about the same.
Q5. What works as a proof of rent paid by me during the year?
You must keep the receipts of rent paid during the year. The same has to be produced at the time of filing Income Tax Returns (ITR). In case, rent receipt is not available, you will be required to file your lease agreement along with the bank statement that shows rent paid.
Q6. How can I claim an HRA exemption?
You can claim HRA exemption by submitting proof of rent receipts to your employer. Alternatively, you can also claim your HRA exemption yourself while filing your ITR.