HRA EXEMPTION RULES: How to save tax on House Rent Allowance

For most employees, House Rent Allowance (HRA) is a common component of their salary structure. Although it is a part of the salary, HRA, unlike basic salary, is not fully taxable. Subject to certain conditions, a part of HRA gets exempted under Section 10 (13A) of the Income-tax Act, 1961.

The amount of HRA exemption is deductible from the total income before arriving at a taxable income. This helps the employee save tax. Remember, the HRA received is fully taxable if an employee is living in his own house or if he does not pay any rent.

Who can avail HRA?

The tax benefit is available only to a salaried individual who has the HRA component as part of his salary structure and is staying in a rented accommodation. Self-employed professionals cannot avail the deduction.

How much HRA is exempted?

The exemption for HRA benefit is the minimum of:

i) Actual HRA received;

ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and

iii) Excess of rent paid annually over 10% of annual salary for calculation purpose, the salary considered is ‘basic salary’. In case ‘Dearness Allowance (DA)’ (if it forms a part of retirement benefits) and ‘commission received on the basis of sales turnover’ is applicable, they too are added to compute the minimum HRA exemption available. The tax benefit is available to the person only for the period in which the rented house is occupied.

 How to calculate taxable amount of HRA

Let’s say an individual, with a monthly basic salary of Rs 15,000, receives HRA of Rs 7,000 and pays Rs 8,400 rent for an accommodation in a metro city. The tax rate applicable to the individual is 20 percent of his income. To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable

i) Actual HRA received = Rs 84,00

ii) 50% of salary (metro city) = Rs 90,000 (50% of Rs 1, 80,000)

iii) Excess of rent paid annually over 10% of annual salary = Rs 82,800 (Rs 1,00,800 – (10% of Rs 1,80,000))It shows that of Rs 84,000 actually received as HRA, Rs 82,800 gets tax exemption and only the balance of Rs 1,200 gets added to the employee’s income, on which a tax of Rs 240 ( 20 per cent slab ) gets payable.

Documents for submission

HRA exemptions can be availed only on submission of rent receipts or the rent agreement with the house owner. It is mandatory for the employee to report the Pan Card of the ‘landlord’ to the employer if the rent paid is more than Rs 1, 00,000 annually.

Special cases
There could be special scenarios in claiming HRA tax benefit, such as:

1. If an individual is paying rent to family members: The rented premises must not be owned by the person claiming the tax exemption. So if you stay with your parents and pay rent to them then you can claim that for tax deductions as HRA. However, you cannot pay rent to your spouse. As, in the view of the relationship, you are supposed to take the accommodation together. Thus, these transactions can invite the scrutiny from the Income -tax Department.Even if you are renting the house from your parents, make sure you have documentary evidence as proof that financial transactions regarding your tenancy takes place between you and your parent. So keep a record of banking transactions and rent receipts because your claim can get rejected by the tax department if they are not convinced by the authenticity of the transactions. Recently, there has been an instance in which the HRA claim of a salaried taxpayer was rejected by the Mumbai income tax appellate tribunal because the claim for HRA did not appear genuine to the tax officials.
2. Own a house, but staying in a different city: One can avail the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home is rented out or you work in another city.
3. Individuals who don’t get HRA but pay rent: There may be some employees who might not have HRA component in their salary structure. Also, a non-salaried individual might be paying rent. For them, Section 80 (GG) of the Income-tax Act offers help.

An individual paying rent for a furnished/unfurnished accommodation can claim the deduction for the rent paid under Section 80 (GG) of the I-T Act, provided he is not paid HRA as a part of his salary by furnishing Form 10B.

Exemption available u/s 80GG:

The least of the following is available for exemption from tax under Section 80GG:

(i) Rent paid in excess of 10% of total income

(ii) 25% of the total of the total income*

(iii) Rs. 5,000 per month

*Under this section, the total income is calculated as gross total income minus long-term capital gains, the short-term capital where Securities Transaction Tax (STT) has been paid and deductions available under Sections 80C to 80U, except Section 80GG.

Conditions
While claiming a tax deduction, one must remember that the individual himself or his/her spouse, or minor child, or as a member of the Hindu Undivided Family (HUF) must not own any accommodation. Also, if the individual owns any residential property at any place and earns rent from it then no deduction is allowed.

One can avail the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home is rented out or you work in another city. However, the same is not available in case of Section 80GG.