Understanding the Meaning and Taxability of HRA : House Rent Allowance


Almost every rent payer has to let go of a major chunk of his monthly income with a heavy heart. Baring house rent expenses instead of a vacation, shopping or investment is a stressful experience. Thankfully, the government is focused towards protecting basic needs and provides some relaxation in the form of House Rent Allowance (HRA) tax exemption!!!

 

Let’s first understand what does HRA mean?

HRA is the amount paid by the employer to the employees to help them meet the costs of living in rented accommodation. Most of the employers of both private and public sector/organizations pay HRA as one of the sub-components of salary to their employees.

The best part! The salaried individuals who live in a rented house can claim tax exemption on HRA under Section 10 (13A) of Income-Tax Act. An employee has to submit Form 12BB to the employer to claim the exemptions like HRA, LTA etc. and Income Tax deductions under Chapter VI-A.

It is to be noted that the Self-employed individuals can also claim tax exemption for the rent paid under Section 80GG of the Income Tax Act.

 

What is the amount of tax exemption on HRA?

HRA tax exemption basically depends on four components: Salary, HRA component of the salary, Rent paid and Location of your rental accommodation.

The exemption for HRA benefit is the minimum of:

  • The total amount of HRA received
  • 50 percent of salary if living in metro cities or 40 percent for non-metro cities
  • Excess of rent paid annually over 10% of annual salary

Experts’ advice to consider these points in the salary structure to avail maximum benefit as the least of the above is exempt from tax. You can also use our free HRA calculator tool to compute HRA exemption amount on your salary.

Tax exemption can be calculated annually if the above factors remain constant throughout a financial year. Otherwise, the calculation needs to be done on a monthly basis.


Let us explain the HRA tax exemption calculation with an example –

Meet Mr.
Modi, with a monthly basic salary of Rs 30,000. He receives HRA of Rs 14,000 and pays Rs 16,000 rent for an apartment in a metro city. The tax rate applicable to his salary is 20 percent. 

To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:
 
i) Actual HRA received = 14,000 * 12= Rs. 1,68,000
ii) 50% of salary (metro city) = 50% of Rs 3,60,000 = Rs. 1,80,000
iii) Excess of rent paid annually over 10% of annual salary = Rs 1,92,000 – (10% of Rs 3,60,000) =Rs 1,56,000

In the above calculation, the sum of excess of rent paid annually over 10% of annual salary comes out to be least amongst the above three indicators. Therefore, the amount exempted u/s 10(13A) shall be Rs. 1,56,000.

 So, as we saw, Mr. Modi received  Rs 1,68,000 as HRA whereas gets tax exemption on Rs. 1,56,000 .Therefore, only the balance of Rs 12,000 get added to his annual income, on which a tax of Rs 2,400 ( 20 percent slab) gets payable. 

 

Regulation of HRA Tax Exemption in different circumstances :

Now, that we have understood the meaning and calculation of HRA tax exemption. Let’s find out the tax benefit of HRA under real-life situations-

  • Tax Exemption on HRA when you live with your parents:

You can apply for HRA exemption as the rent has to be paid to the owner of the property which means it can be your parents too.

In that case, the rent you pay to your parents gets added to their taxable income.

Make sure to keep banking transactions to prove that financial transactions regarding your tenancy took place between you and your parent. Further, rent receipts or rental agreement should also be kept as an evidence.

  • Tax Exemption on HRA when you stay in a rented house but you also own a house in the same city:

In this scenario, you have to justify some valid reason i.e. why you are not living in your owned house. One case may be that the office location is very far from the house you own. This way you can claim both HRA and Home loan benefits.

  • Tax Exemption on HRA when you stay in a rented house but you also own a house in a different city:

In this scenario, you are eligible to claim tax benefit, if you had to shift to some other city due to job requirements.


What are the Important conditions to be taken care in order to claim HRA tax exemption?

  • Rent receipt, if the rent is more than Rs. 3,000 per month and rental agreement is also suggested for documentation evidence.
  • For HRA exemption, the salary shall be total of basic salary, ‘Dearness Allowance (DA)’ (if it forms a part of retirement benefits) and ‘commission on the basis of sales turnover’.
  • A person can claim HRA exemption only for the period during which he stayed in a rented accommodation.
  • Owner’s PAN is mandatory if the rent is more than Rs. 8,333 per month.

How to claim HRA exemption at the time of filing Income Tax Return (ITR)?

As you know, for claiming HRA, you have to submit an income declaration form i.e. Form 12BB to your employer. But in case, if you could not furnish the required details in Form 12BB then the last resort is claiming it while filing the ITR.  

Follow these basic steps to claim HRA exemption at the time of filing ITR:

  1. Calculate the amount eligible for HRA exemption as explained above, you may also take help of our free HRA calculator.
  2. Subtract the calculated amount from your Salary income.
  3. Mention this income in the ITR

However, it is suggested to provide the required information timely in the income declaration form at the beginning of the year. This will save your time and money.

A Note of Caution:

On providing fake rent receipts in the name of parents, spouse or other close relatives, you may fall into trouble. The Income Tax Department shall disallow fake HRA exemptions. So, be aware and claim the correct amount only.

The below image will help you have a quick look on the provisions of HRA : 

House Rent Allowance

House Rent Allowance

 Conclusion:

A salaried employee must not miss an opportunity to claim HRA tax exemption, as this is the one of the best legal way to save tax. Make sure to keep all authentic pieces of evidences. To be on a safer side , opt for money transfer through bank account as it difficult to substantiate rental payments made in cash.The amount of exemption is computed as per sec 10(13A) of Income Tax Act. If you find it troublesome to calculate the amount of exemption, then use Tax2win’s accurate and free HRA calculator

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Team Tax2Win