Housing is the basic need of every individual. While some have a house in their name, others live in rented properties and pay rent, every month, for accommodation. Since housing is a basic need and the rental income eats into the income of an individual, the Income Tax Act, 1961 introduced the concept of House Rent Allowance (HRA) wherein you can claim tax benefits for the rental expense that you incur on accommodation. Let’s have a look at what HRA is all about.
What is House Rent Allowance?
House Rent Allowance, or HRA as it is popularly called, is an allowance that an employer pays to his employees who live in rented accommodations. HRA forms a part of employee compensation for salaried individuals. Moreover, it is also a tax-exempt allowance wherein employees are allowed to claim exemption on the allowance that they receive from their employers for their rental expenses. In other words, the HRA paid by the employer is considered to be a basic component of employee compensation which can be used by employees to lower their taxable salary income.
HRA exemption in income tax for salaried individuals
The tax exemption that salaried individuals can claim on the HRA that they receive from their employers is laid down under Section 10-13A of the Income Tax Act, 1961. According to the provisions of the section, the lowest of the following amounts would be allowed as an exemption for salaried individuals –
- Actual amount of HRA received from the employer
- 50% of the basic salary (including Dearness Allowance) if you live in a metropolitan city. If you don’t live in a metropolitan city, the rate reduces to 40% of the basic salary (including Dearness Allowance)
- Rent paid – 10% of the basic salary (including Dearness Allowance)
For example, if your basic salary (including Dearness Allowance) is INR 50,000/month, you receive a HRA of INR 12,000/month and the actual rent paid is Rs.15,000/month, the exemption that you would be allowed to claim would be calculated as follows –
Actual HRA received
50% of your basic salary (assuming you live in Mumbai)
50% of 50,000 = INR 25,000
Rent paid – 10% of basic salary
15,000 – 10% of 50,000
= 15,000 – 5000
HRA exemption available (lowest of the three)
You would, thus, be able to avail of an exemption of INR 1.2 lakhs every financial year.
Claiming HRA exemption when rent exceeds INR 1 lakh
If the aggregate annual rent that you pay exceeds INR 1 lakh, you can claim HRA exemption. However, in such cases, you would have to furnish a copy of your landlord’s PAN card to claim the exemption. So, besides the rent receipts, that serve as proof of rent, the landlord’s PAN card copy would have to be submitted to claim HRA exemptions failing which the exemption would not be allowed.
HRA exemption in income tax for self-employed and other employees
If you live in rented accommodation and you are –
- A self-employed individual, or
- Salaried individual but your employer does not offer HRA as a part of your salary component
Then also you can claim a house rent deduction in income tax. However, in such cases, HRA deduction would be allowed under the provisions of Section 80GG and not under Section 10-13A. Moreover, the eligible amount for HRA deduction would also be different. It would be the lowest of the following –
- INR 5000/month
- 25% of adjusted total income
- Rent paid – 10% of adjusted total income
The adjusted total income for calculation purposes would be calculated as the total income minus the following –
- Long term capital gain
- Short term capital gain under Section 111A of the Income Tax Act, 1961
- Incomes under Sections 115A and 115D
- Deductions under Sections 80C to 80U excluding deduction under Section 80GG for HRA
Say you have an adjusted total income of INR 60,000/month and you pay a rent of INR 15,000/month. You are a self-employed individual claiming HRA under Section 80GG. The available HRA deduction would be as follows –
25% of adjusted total income
25% of 60,000 = INR 15,000
Rent paid – 10% of adjusted total income
15,000 – 10% of 60,000
= 15,000 – 6000
= INR 9000
Eligible HRA deduction (lowest of the three)
In a year, you would be allowed to claim an HRA deduction of INR 60,000 under Section 80GG.
Calculating HRA requires you to remember the HRA exemption rules pertaining to each section, i.e. Section 10-13A and Section 80GG. In case you forget these HRA exemption rules or you want to calculate the tax-eligible HRA quickly, online HRA calculators are available. You just need to enter in –
- Your basic salary, including Dearness Allowance
- HRA allowance paid by the employer
- Actual rent paid
- Adjusted total income (in the case of claiming deduction under Section 80GG)
- Your location
After these details are provided, the online HRA calculator calculates the HRA exemption that you can claim in your income tax returns.
Claiming HRA exemptions when you have a home loan
There might be instances when you have your own home and yet you are living in rented accommodation. This happens when your own home is located in another city or town while you live in another place for work-related reasons. In this case, if you have a home loan on the home that you own, you can claim tax benefits on the home loan. Moreover, for the rent paid on the rented home, you can also claim the HRA exemption allowed by the Income Tax Act, 1961.
So, you can claim tax benefits on the owned home as well as on the rented one in the following manner –
- Principal repayment of the home loan can be claimed as a deduction under Section 80C up to INR 1.5 lakhs
- Interest paid on the home loan can be claimed as a deduction under Section 24(b) up to INR 2 lakhs
- The additional deduction is available on the interest paid on the home loan if you are a first-time homebuyer and the stamp duty value of the house is up to INR 45 lakhs. In such cases, you can claim a deduction of up to INR 1.5 lakhs under Section 80 EEA, in addition to the deduction of INR 2 lakhs available under Section 24(b)
- HRA exemption under Section 10-13A
To claim these tax benefits, however, you would have to prove that the owned home and the rented home are in two different places. Moreover, the rental income earned from the owned home that you might have let out for rent would be taxed in your hands.
HRA exemption when living with parents
If you are living with your parents in a house that is in their name, you can still claim HRA exemption from your income. All you would have to do is to enter into a rent agreement with your parents and pay the rent every month. Ask your parents to issue you a rent receipt that you can submit as proof of rent and claim HRA exemption. The exemption for HRA would be allowed under Section 10-13A or under Section 80GG, as the case may be.
HRA exemption rules
Here are some rules for claiming HRA exemptions under the Income Tax provisions –
- The HRA amount, offered by the employer, should not exceed 50% of the basic salary
- Rent paid to the spouse would not be allowed as a valid rent for HRA exemption
- If your landlord is an NRI, a TDS of 30% of the rent should be deducted by you and declared to the income tax authorities
- You should mention the HRA exemption or deduction in your income tax returns
Documents needed to claim HRA exemption
There are some documents that you would have to submit to claim HRA deduction. These documents include the following –
- A rent agreement between you and the owner of the home wherein you are staying
- The rent receipts of each month wherein you have paid rent and against which you are claiming HRA exemption
- PAN card copy of the landlord if the aggregate rent paid in a financial year exceeds INR 1 lakhs
- Form 16, issued by the employer, to check the HRA allowed
- Revenue stamp, affixed on all rent receipts and cross-signed by the landlord
- Declaration in Form 10-BA for claiming deduction under HRA exemption Section 80GG
In the case of Government employees, if an employee does not live in accommodations paid for by the Government, according to prescribed procedures, the Government issues the employee with an HRA certificate. The employee can, then, claim HRA exemptions using the HRA certificate.
Things to remember
While HRA can give you attractive tax savings, here are some important facts that you should remember about claiming such benefits –
- HRA is calculated every month. If you don’t pay rent in one or more months, HRAs for those months would not be available
- Section 80GG house rent deduction in income tax would not be available if you own a house property anywhere, even though you don’t live in it
- If you switch jobs or cities, the HRA calculation would also change as your basic salary and location has changed, changing the equation
- To claim deduction under Section 80GG, you would have to fill up and submit Form 10-BA to declare that the eligibility parameters of the HRA exemption section have been fulfilled.
Insurance plans – an additional way to save taxes
Other than HRA exemption, you can also save taxes by investing in insurance plans. Both life and health insurance plans allow tax savings to investors besides offering protection and financial security. Here’s how –
- Life insurance
Premiums paid for life insurance plans are allowed as a deduction from your taxable income up to an extent of INR 1.5 lakhs under Section 80C. Moreover, the policy benefits are also tax-free in nature under the provisions of Section 10(10A) of the Income Tax Act, 1961.
- Health insurance
Health insurance premiums also qualify for tax deductions under Section 80D. Premiums paid up to INR 25,000 can be claimed as a deduction. In the case of senior citizens, premiums up to INR 50,000 can be claimed as a deduction. Moreover, if you pay premiums for your parents, you can claim an additional deduction of INR 25,000 or INR 50,000 depending on the age of your parents.
So, save maximum taxes by claiming HRA exemptions and also by investing in life or health insurance plans. This would also help you increase your disposable income and boost your savings.