Last Updated on Feb 25, 2022 by
If you are a salaried employee, you must have noticed a separate provision for House Rent Allowance on your payslip. Let us get into the details of this part of your income.
This article covers:
- What is HRA?
- Deductions in HRA
- Rules for calculating the deduction for HRA
- How to calculate the exemption from HRA?
- How to claim the deduction?
Table of Contents
What is HRA?
House Rent Allowance, or HRA, is a part of your salary that your employer provides as compensation for the rent paid by you. It should be kept in mind that HRA is provided for residential purposes only. You cannot claim HRA for a place you rent for carrying out a business.
While filing your tax return, you can claim a deduction for this amount, subject to certain rules. This reduces your tax liability to some extent. Let us see how.
Deductions in HRA
Section 10 (13A) of the Income Tax Act, 1961 contains provisions for deductions regarding the amount received as HRA. Moreover, this is only for salaried employees. If you are self-employed, you cannot claim deductions for HRA under this section. The Income Tax Act has separate provisions for such individuals under Section 80GG.
The new tax regime, introduced from FY 2020-2021 onwards, has removed this provision. However, if you choose to continue with the old regime, it is crucial to keep in mind a few things that help in determining the exempted amount. Factors such as your area of residence, amount of rent paid, and salary received affect the calculation of HRA. We have listed the rules for you to follow to ease out the calculations.
Rules for calculating the deduction for HRA
- If you reside in a metro city, HRA exemption is calculated by taking 50% of your basic salary. For this purpose, only Delhi, Chennai, Kolkata, and Mumbai are considered metro cities.
- If you reside in a non-metro city, then the HRA exemption is calculated as 40% of your basic salary.
- In case you reside in a place that is different from your place of work, the place of residence will be taken for calculating the exemption.
- If you do not live in a rented accommodation, but in your own house, then you cannot claim a deduction for HRA.
- It is not necessary for your landlord to be an unrelated third party. You can show that you are paying rent to your parents by entering into a rent agreement with them. However, they will have to show this amount as rental income while filing their tax return.
- You cannot enter into a rent agreement with your spouse and show them as the landlord.
- You must furnish the rent receipts to avail of the exemption from tax.
- You must also provide the PAN details of your landlord as proof. This is required only if your rent exceeds Rs. 1 lakh per annum.
How to calculate the exemption from HRA?
The amount of exempted HRA is taken as the least of the following:
- The actual amount of HRA received by you.
- 40% (or 50%, if you are living in a metro city) of the salary.
- The amount of rent paid minus 10% of the salary.
Here, salary is taken as basic salary + dearness allowance + commission on sales, if any. Let us understand this with an example:
Assume Mr. A recently took up a job in Mumbai and shifted to the metro city from his hometown. He started living in a rented flat, where he pays Rs. 30,000 as rent per month. He earned a basic salary of Rs. 55,000 per month. In addition, he received Rs. 5,000 as dearness allowance. His employer provided him with an HRA of Rs. 1,50,000 per annum.
The amount that can be deducted will be calculated as follows:
|Particulars||Amount (Rs. per annum)|
|Actual HRA received||1,50,000|
|50% of basic salary + DA= 50% * (55,000 + 5,000) * 12||3,60,000|
|Rent paid – 10% of salary= (30,000 * 12) – (10% * 60,000 * 12)= 3,60,000 – 72,000||2,88,000|
|Amount exempt (least of the three)||1,50,000|
To make your task easier, you can do this calculation online. Open an online HRA calculator and fill in the relevant details of your income. The exempted amount gets calculated with just a click.
How to claim the deduction?
Once you pay the rent, you receive a slip as proof of the payment. You can submit this to your employer, along with the rental agreement and the PAN details of your landlord (in case the amount is more than Rs. 1 lakh per annum). After collecting these details, your employer calculates the exempted amount and shows the adjustment in Form 16.
An alternate way to claim this deduction is while filing the tax return yourself. Under the ‘salaries’ section, you can show the exempt amount under the head ‘allowances to the extent exempt under Section 10’. The remaining amount is taxable as per the rate applicable according to your tax slab.
Moreover, HRA does not affect the deduction claim for interest on a home loan. Both the claims can be made if you own a house but live in rented accommodation. However, both the houses must be in separate cities. If not, the two properties must be at a distance. This can be based on a genuine reason, such as your workplace being too far from your own house, due to which you must live in a rented place.
If your employer does not provide HRA separately, you can claim an exemption for the rent paid under Section 80GG of the Act.
House Rent Allowance is a vital component of your salary. Ensure that you update yourself with the latest provisions to gain the maximum tax benefit. Do collect all your rent slips to ensure seamless adjustment of the exempted amount. Reach out to your financial advisor for professional guidance on HRA tax exemption.