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House Rent Allowance (HRA): HRA Exemptions & Tax Deductions

House Rent Allowance (HRA) HRA Exemptions & Tax Deductions

What is House Rent Allowance (HRA)

House Rent Allowance (HRA) is an allowance provided by employers to employees to cover the cost of rented accommodation. Under the Income Tax Act, specifically Section 10 (13A), HRA can be claimed for tax exemption, subject to certain conditions.

HRA is initially considered taxable income. However, if you are living in rented accommodation, you can claim a tax exemption either partially or wholly.

Conditions for Claiming HRA Exemption

To claim HRA exemption, you must live in rented accommodation, receive HRA as part of your salary, and submit valid rent receipts and proof of rent payments.

 

HRA for Self-Employed: Individuals who are self-employed cannot claim HRA but can avail tax deductions towards rented accommodation under Section 80GG.

New Tax Regime: It’s important to note that the tax exemption of HRA is not available if you choose the new

 

Calculation of HRA Exemption:

The exemption amount is the lowest of the following:

  • Actual HRA received.
  • 50% of [basic salary + DA] for those living in metro cities (Delhi, Kolkata, Mumbai, Chennai) or 40% for non-metro cities.
  • Actual rent paid minus 10% of [basic salary + DA]

Here’s an example to illustrate the calculation:

Let’s assume an individual named Priya lives in Mumbai (a metro city) and has the following details:

  • Basic Salary: ₹50,000 per month
  • Dearness Allowance (DA): ₹5,000 per month
  • Actual Rent Paid: ₹20,000 per month
  • HRA Received: ₹25,000 per month

The HRA exemption would be calculated as follows:

  1. Actual HRA received: ₹25,000
  2. Rent paid minus 10% of salary: ₹20,000 – 10% of (₹50,000 + ₹5,000) = ₹20,000 – ₹5,500 = ₹14,500
  3. 50% of basic salary for metro city: 50% of ₹50,000 = ₹25,000

The minimum of these three amounts is ₹14,500, which is the HRA exemption Priya can claim. The remainder of her HRA, ₹10,500 (₹25,000 – ₹14,500), would be added back to her taxable salary

 

Documents Required to Claim HRA Tax Exemption

To claim House Rent Allowance (HRA) tax exemption, you need to provide the following documents:

  1. Rent Receipts: These are mandatory if your annual rent exceeds ₹1,00,000 or if your monthly rent is above ₹8,333. The rent receipts should be provided by the landlord.
  2. Landlord’s PAN: If the total annual rent paid is more than ₹1,00,000, then the PAN number of the landlord must be mentioned. If the landlord does not have a PAN, a declaration from the landlord stating the same is required.
  3. Rent Agreement: This should be furnished if demanded by the employer. It’s a good practice to have a valid rent agreement with your landlord, which includes basic details of both the tenant and the landlord, and clauses compliant with income tax laws.
  4. Bank Statements: Showing the rent payment transactions, especially if the rent is paid via cheque or electronic payment modes, to establish a clear trail of payment.
  5. Proof of Payment: This is to show that the rent was actually paid during the financial year. It’s advisable to pay rent through banking channels to have proper evidence.

Can I Claim HRA and Deduction on Home Loan Interest?

Yes, you can claim both House Rent Allowance (HRA) and deduction on home loan interest under certain conditions. This can be particularly beneficial if you are paying rent for accommodation and also servicing a home loan for a property that is not the one you are residing in. Here’s how you can avail both benefits:

  • HRA: If you are a salaried individual receiving HRA and living in rented accommodation, you can claim HRA exemption under Section 10 (13A) of the Income Tax Act.
  • Home Loan Interest Deduction: You can claim a deduction on the interest paid on a home loan for a property under Section 24 of the Income Tax Act. The maximum deduction allowed is ₹2 lakh for a self-occupied property.
  • Principal Repayment: Additionally, the principal repayment of the home loan qualifies for a deduction under Section 80C, with a limit of ₹1.5 lakh.
  • Conditions for Claiming Both:
    • You must be residing in a rented house and paying rent.
    • The property on which you have taken the home loan should not be the one you are currently residing in.
    • If you own a house in one city but work and live on rent in another city, you can claim both benefits.
    • The home loan should be on a property in your own name or jointly with someone else.
  • Old vs New Tax Regime: It’s important to note that these exemptions/deductions are available under the old tax regime. If you opt for the new tax regime, you cannot avail of these benefits.

Remember, while you can claim both benefits, the actual amount of exemption and deduction will depend on various factors such as the amount of rent paid, HRA received, interest on home loan, and the city of residence.

 

What If I Don’t Receive an HRA?

If you don’t receive a House Rent Allowance (HRA) as part of your salary, you can still claim a deduction for the rent you pay under Section 80GG of the Income Tax Act, 1961. This provision is especially beneficial for those who are self-employed or work for employers who do not offer an HRA component.

Here’s how you can claim this deduction:

  1. Eligibility: You should not have received HRA at any time during the financial year, and you must be living in rented accommodation.
  2. Conditions: You, your spouse, minor child, or the HUF you are a part of should not own any residential accommodation at the place of your employment.
  3. Declaration: You need to file a declaration in Form 10BA stating that you satisfy the conditions mentioned in Section 80GG.
  4. Calculation: The deduction is the least of the following three amounts:
    • Rent paid minus 10% of your adjusted total income.
    • 25% of your adjusted total income.
    • A maximum of ₹5,000 per month (which amounts to ₹60,000 annually).

Remember, the total income for this calculation is your gross income minus other deductions under the Income Tax Act.

It’s important to note that if you opt for the new tax regime, you cannot claim this deduction.

 

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

How to claim HRA
How to claim HRA

To claim the House Rent Allowance (HRA) exemption when filing your Income Tax Return (ITR) in India, you can follow these steps:

  1. Calculate the HRA Exemption: Determine the amount of HRA that is exempt from tax using the criteria mentioned earlier. This involves finding the minimum of the actual HRA received, the actual rent paid minus 10% of the salary, and 50% (or 40% for non-metro cities) of the basic salary.
  2. Fill in the ITR Form: Enter the calculated tax-exempt HRA amount in the relevant section of your ITR form. If you’re using ITR-1, this will be under the ‘Salary as per section 17’ section.
  3. Attach Supporting Documents: If you have not submitted rent receipts or the rent agreement to your employer, you should attach these documents as proof of rent paid and HRA received when filing your ITR.
  4. Form-16: If you have submitted the rent documents to your employer, the exempted HRA will be reflected in your Form-16. Ensure that the taxable part of HRA, if any, is mentioned under the ‘Gross Salary’ in Form-16 and reported in your ITR-1 form.
  5. Landlord’s PAN: If your annual rent exceeds ₹1 lakh, you are required to provide your landlord’s PAN.
  6. Choose the Right Tax Regime: Remember that to claim HRA exemption, you must opt for the old tax regime. If you choose the new tax regime under Section 115BAC, you cannot claim HRA exemption.

Conclusion

In conclusion, the House Rent Allowance (HRA) exemption allows employees to reduce their taxable income by claiming a portion of their HRA as non-taxable, based on actual rent paid, HRA received, and salary components.

The exemption is particularly beneficial for those living in rented accommodations in metro cities, where the exemption can be claimed up to 50% of the basic salary.

It’s a significant tax-saving provision that can effectively lower one’s tax liability if utilized correctly.

Always remember to keep rent receipts and any related documents as proof for claiming HRA exemption during the income tax filing process. For precise calculations and tax planning, it’s advisable to consult with a tax expert.

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