ITR
What is House Rent Allowance, HRA Exemptions and Deductions
One of the key components of salary for many employees is the House Rent Allowance (HRA). It is an important allowance that helps to manage the expenses of rented accommodation. In India, the tax treatment of HRA is governed by the Income Tax Act, and understanding its provisions is essential for both employees and employers.
What is House Rent Allowance?
House Rent Allowance is a component of the salary that is provided by employers to employees to meet the cost of rented accommodation. It is given to those employees who live in rented houses and don't own a property at their place of work or residence.
Tax Benefits under HRA
The Income Tax Act provides certain tax benefits to individuals who receive HRA as a part of their salary. The tax benefits are calculated based on the following three factors:
1. Actual HRA received from the employer.
2. Rent paid in excess of 10% of salary.
3. 50% of salary for those living in metro cities (or 40% for non-metro cities).
The least of the above factors is eligible for tax exemption.
How to Calculate HRA Exemption?
To calculate the tax exemption on HRA, you need to follow these steps:
1. Find out the actual amount of HRA received during the year.
2. Calculate the total rent paid (minus 10% of salary).
3. Determine 50% of salary for metro cities or 40% of salary for non-metro cities.
4. The least of the above three amounts is eligible for tax exemption.
Conditions for Claiming HRA Exemption
To claim the HRA exemption, certain conditions need to be met:
1. The individual must be a salaried employee receiving HRA from their employer.
2. They must be living in rented accommodation.
3. The rent must be more than 10% of their salary.
4. The employee should not own a residential property at their place of work or residence.
Documentation Required
For claiming HRA exemption, employees need to provide certain documents such as:
1. Rent agreement or rent receipts.
2. PAN card of the landlord (if the annual rent exceeds Rs. 1 lakh).
3. Rent receipts in case the rent paid exceeds Rs. 3,000 per month (if rent payment mode is not cash).
Illustration
In this illustration, let's consider the case of Mr. Sharma who works in a private company and receives a monthly salary of Rs. 50,000. His basic salary is Rs. 30,000 and he also gets HRA of Rs. 10,000 per month.
Now, let's calculate the tax exemption for HRA using the above formula:
1. Actual HRA received: Rs. 10,000 per month
2. Rent paid - 10% of basic salary: Let's assume Mr. Sharma pays a rent of Rs. 12,000 per month and his basic salary is Rs. 30,000.
3. Rent paid - (10% of basic salary) = Rs. 12,000 - (10% * Rs .30 ,000) = 9000
Minimum amount as prescribed by income tax law: Out of the three calculations mentioned above.
You can try our free HRA Calculator to determine your HRA exemption i.e. how much is exempt from TAX.
So in this case:
The least amount among these three calculations will be considered for tax exemption on HRA i.e., Rs 9,000.
Therefore, Mr.Sharma can claim an exemption on HRA up to Rs. 9,000 from Income Tax Computation.
House rent deduction in case of HRA not received
In case employee does not receive HRA as a part of salary, still he can claim rent paid under section 80GG with following conditions:
1. You are self-employed or salaried
2. You have not received HRA at any time during the year for which you are claiming 80GG
3. You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession.
In case you own any residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. The other property would be deemed to be let out in order to claim the 80GG deduction.
Deduction limit under section 80GG:
The deduction admissible u/s 80GG will be least of the following amount:
1. Rs. 5,000 per month:
2. 25% of adjusted total income*
3. Actual Rent less 10% of adjusted total Income*
* Adjusted Total Income means Total Income Less long-term capital gain, short-term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U (except deduction under section 80GG).