House Rent Allowance (HRA) is a common component of salary packages provided by employers to employees in order to meet their housing expenses. It is a beneficial allowance as it provides tax benefits to individuals who live in rented accommodation. This detailed blog will help you understand HRA exemption, the rules associated with it, and how to claim HRA deductions.
What is House Rent Allowance (HRA)?
HRA is given to employees who live in rented accommodations and is intended to offset a portion of their rental costs. The purpose of HRA is to provide financial assistance to employees in meeting their housing needs. HRA is a taxable component of income, but certain exemptions and deductions are available under the Income Tax Act to reduce the tax liability associated with it.
What is HRA for Self-Employed Individuals?
Self-employed individuals have the opportunity to avail deductions and tax exemptions related to House Rent Allowance (HRA). These benefits can be claimed by utilizing the provisions specified in Section 80 GG of the Income Tax Act.
What is HRA for Salaried Individuals?
Salaried individuals have the option to claim exemptions for House Rent Allowance (HRA) under Section 10 (13A), rule number 2A of the Income Tax Act. Since HRA forms a significant portion of an individual’s salary, it is essential to adhere to the policies set by the employer regarding the procedure for claiming HRA.
Eligibility Criteria for Availing Tax Deductions on House Rent Allowance (HRA)
To qualify for tax deductions on House Rent Allowance (HRA) as per Section 10 (13A) of the Income Tax Act, individuals must meet the following eligibility criteria:
- Employment Status: The individual seeking HRA deductions must either be self-employed or employed in a salaried position.
- Rented Residence: The current place of residence must be rented. HRA calculations consider only rented properties, not the individual’s personal dwelling.
- Documentation: A house rent receipt or any other valid proof of residence is required to support the claim for HRA deductions.
Documents Required for Claiming Tax Exemptions on House Rent Allowance
- PAN card details and a copy of the landlord/property owner are mandatory if the rent paid during the fiscal year exceeds Rs. 1 Lakh. These documents are necessary to claim HRA tax exemption.
- Rent payment receipts must be provided by the employee. The receipts should include the following information:
- Date and identity of the landlord
- Tenant’s name
- PAN card details of the landlord if the rent exceed above 1 lakh annually
- Address of the rented accommodation
- Duration of the stay
- A revenue stamp if the rent exceed above 1 lakh annually
- Landlord’s signature on the revenue stamp
- Each receipt can be utilized for a duration of 3 months, implying that a minimum of the most recent 4 receipts should be procured for an entire year.
- If applicable, a photocopy or Xerox of the rent agreement should be included.
HRA Exemption Rules & Tax Deductions
- HRA cannot exceed 50% of your basic salary.
- The HRA exemption is determined by the smallest value among these: a) Actual rent paid minus 10% of your basic salary, b) Actual HRA received from your employer, c) 50% of your basic salary if you reside in a metro city.
- Even if you have a home loan, you are eligible to claim HRA benefits.
- If you reside in your own house, you can pay rent to your parents, provide the necessary proof, and claim HRA benefits. However, paying rent to your spouse and claiming HRA is not allowed.
- When your rent exceeds Rs. 1,00,000, you must include your landlord’s PAN details along with the HRA claim form.
- If your landlord is an NRI, you have the option to deduct 30% tax from the rent and declare it.
HRA Tax Exemption Application Rules
To determine the HRA tax exemption, the following rules apply:
- Exact HRA received.
- Actual rent paid minus 10% of your salary.
- 50% of your basic salary if you live in a metro city.
- 40% of your basic salary if you live in a non-metro city.
Out of these rules, the one that gives you the least tax amount is eligible for HRA tax exemption. You can ask your employer to adjust your salary accordingly to maximize your tax benefits.
If the factors influencing your HRA remain constant throughout the year, you can calculate the HRA annually. However, if any factor changes during the financial year, it is advisable to calculate it on a monthly basis.
Understanding HRA Tax Exemption: A Practical Example
To better understand how HRA tax exemption works, let’s consider the following scenario:
Ms. Sharma is employed in Bengaluru and resides in a rented apartment. She pays a monthly rent of Rs. 25,000 during the financial year 2022-23. Her employer provides her with an HRA of Rs. 30,000 per month. Now, let’s calculate the eligible HRA amount that can be exempted from income tax:
- Actual HRA received: Rs. 30,000 x 12 = Rs. 3,60,000
- Actual rent paid minus 10% of basic salary: Rent paid for the year = Rs. 25,000 x 12 = Rs. 3,00,000 10% of basic salary = 10% of (Ms. Sharma’s basic salary per month x 12) Let’s assume her basic salary is Rs. 60,000 per month: 10% of Rs. 60,000 x 12 = Rs. 72,000 Exemption amount = Rs. 3,00,000 – Rs. 72,000 = Rs. 2,28,000
- 40% of basic salary (since she lives in Bengaluru): Exemption amount = 40% of (Ms. Sharma’s basic salary per month x 12) Exemption amount = 40% of Rs. 60,000 x 12 = Rs. 2,88,000.
In this example, the HRA tax exemption that Ms. Sharma can claim will be Rs. 2,28,000, which is the least among the calculated figures.
When Is the Landlord’s PAN Required?
If you have rented a house and your annual rent payment exceeds Rs. 1 lakh, it is important to provide the landlord’s PAN (Permanent Account Number). Failing to do so could result in the loss of HRA (House Rent Allowance) exemption.
In cases where the landlord does not possess a PAN, they are required to provide a self-declaration stating their non-possession of PAN, as per circular No. 8/2013 dated 10 October 2013.
For tenants who pay rent to NRI (Non-Resident Indian) landlords, it is necessary to deduct TDS (Tax Deducted at Source) of 30% before making the rent payment.
What Happens if I Do Not Receive House Rent Allowance?
If you are renting a residential accommodation but do not receive HRA from your employer, you can still be eligible for the deduction under Section 80GG. To qualify for this deduction, you need to meet the following conditions:
- You are either self-employed or employed on a salary basis.
- You have not received any HRA throughout the year for which you are seeking the deduction under Section 80GG.
- Neither you, your spouse, your minor child, nor the Hindu Undivided Family (HUF) to which you belong own any residential property at the location where you currently reside, perform office duties, or conduct business or profession.
How to Claim HRA When Living with Parents?
Let’s explore a hypothetical situation involving Sonia, who is employed at a multinational company in Mumbai. Despite living with her parents in their house, Sonia can still avail house rent allowance (HRA) benefits. Here’s a guide on how she can maximize her HRA exemptions:
- Sonia can establish a rental agreement with her parents and pay them rent. This ensures a legitimate arrangement and allows her to claim HRA benefits. It is important to document the agreed-upon rent amount and make regular monthly payments to her parents.
- Both Sonia and her parents can benefit from this arrangement in terms of tax savings. Her parents should maintain records of the rent payments received from Sonia and include them when filing their income tax returns (ITRs).
- It’s worth noting that living with parents doesn’t restrict individuals from claiming HRA benefits. Additionally, individuals can also claim HRA benefits while simultaneously benefiting from deductions on home loan interest payments. Various online HRA calculators can assist in determining the taxable and exempt portions of HRA.
- It’s crucial to emphasize the importance of establishing a valid rental arrangement and maintaining supporting documentation even when living with parents. This ensures that HRA benefits are claimed appropriately, maximizes tax benefits, and ensures compliance with relevant regulations.
Tax Exemptions on Rent Payments for HRA Under Section 80GG
Section 80 GG of the Income Tax Act allows individuals to get tax exemptions for the rent they pay. However, to claim these exemptions, employees must not have already claimed deductions under any other section of the Income Tax Act. Self-employed professionals and employees who don’t receive a House Rent Allowance can also claim these exemptions for their rent expenses under Section 80 GG.
Additional Conditions for Section 80 GG:
- The rent exemptions are applicable to individuals and Hindu Undivided Families (HUF).
- Both self-employed individuals and salaried employees can claim deductions for rent if they haven’t already received exemptions under Section 10 (13A).
- The employee/self-employed person’s HUF, minor child, or spouse should not own a property where the individual is working.
- Individuals seeking tax exemptions under Section 80 GG should not claim benefits for a self-occupied property they own elsewhere.
- To avail deductions under Section 80 GG, individuals must provide a self-declaration using Form 10-BA, confirming their compliance with all the conditions.
What Are the Steps to Avail the Deduction Under Section 80GG?
To claim the deduction under Section 80GG, the following conditions must be met:
- The least of the following amounts will be exempt from tax: a) Rs. 5,000 per month, b) 25% of the adjusted total income, and c) The actual rent paid, provided it is less than 10% of the adjusted total income.
- The adjusted total income is calculated as follows: Total income minus: a) Long-term capital gain, b) Short-term capital gain under Section 111A, c) Income under Section 115A or 115D, d) Deductions under Sections 80C to 80U (excluding the deduction under Section 80GG).
Is it Possible to Claim HRA and Deduction on Home Loan Interest?
Yes, you have the option to claim both HRA (House Rent Allowance) and deductions for home loan interest.
To calculate your HRA exemption, you can make use of our free HRA calculator. This tool assists you in determining the portion of your HRA that is taxable and the portion that is exempt from tax.
Deadline for Income Tax Return (ITR) Filing
If you own any residential property other than the one mentioned above, you cannot claim it as self-occupied for tax purposes. Instead, that property will be considered as deemed to be let out in order to claim the deduction under Section 80GG.
ITR Filing Deadline: The deadline for filing Income Tax Returns (ITR) varies based on the individual’s employment status and the need for an income audit. Here are the deadlines:
- Salaried Individuals Claiming HRA Tax Exemptions: The last date for filing ITR and submitting the Income Tax Returns is July 31 of the respective financial year.
- Self-Employed Individuals without Income Audit Requirement: Self-employed individuals who do not require an income audit have a deadline of July 31 for ITR filing.
- Self-Employed Individuals with Income Audit Requirement: Self-employed individuals who need to undergo an income audit have a deadline of September 30 for ITR filing.
Note that these deadlines are subject to change based on the latest regulations issued by the tax authorities.