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House Rent Allowance – Exemption & Tax Deductions

What is House Rent Allowance?

Generally, Employees receive a house rent allowance (HRA) from their employers. In accordance with the terms and conditions of employment, this is a part of the salary.

House Rent Allowance is given to the employee to meet the cost of the house taken on rent. The Income Tax Act allows a deduction to the person paying rent.

The exemption on HRA is covered under Section 10(13A) of the Income Tax Act 1961 and Rule 2A of the Income Tax Rules 1962. It is also noted that the entire HRA is not deductible. HRA is an allowance and is subject to income tax.

To what extent an employee can claim the exemption?

An employee can claim an exemption on the amount of Rent Allowance under the Income Tax Act if he stays in a rented house and he is in receipt of House Rent Allowance from his employer.

In order to claim the deduction, an employee must actually pay rent for the house which he occupies on rent. It is also noted that the rented premises must not be owned by the employee.

In case one stays in an own house, nothing is deductible and the entire amount of House Rent Allowance received is subject to income tax.

As long as the rented house is not owned by the assessee, the exemption of HRA will be available up to the minimum of the following three options:

How to calculate Tax Exemption From HRA?

The deduction available is the least of the following amounts:

  1. Actual HRA received;
  2. 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
  3. Actual rent paid less than 10% of basic salary + DA

Meaning of the Salary for the purpose of HRA:

  • Salary means (Basic + D.A + Commission based on fixed percentage on turnover).
  • Salary is to be taken on due basis in respect of the period during which the period accommodation is occupied by the employee in the previous year

Examples for calculation of exemption/deduction of HRA

Deepak has received the following amount during the previous year.

1. Basic Salary – Rs. (5000*12) – Rs. 60,000/-

2. Dearness Allowance (D.A) – Rs. (1000*12) – Rs. 12000/-

3. House Rent Allowance (H.R.A.) – Rs. (2000*12) – Rs. 24000/-

4. Actual Rent Paid – Rs.(2000*12) – Rs. 24000/-

Calculation

The minimum of the following amount shall be exempt

  • Actual HRA received (2000*12) – Rs. 24000/-
  • Rent Paid in excess of 10% of salary ( 24000-7200) – Rs. 16800
  • 40% of Salary – Rs. 28800/-

Therefore, Rs. 16800 shall be exempt and the balance Rs. 7200 shall be included in gross salary.

Can I Claim HRA and Deduction on Home Loan Interest as well?

Yes, you may claim the HRA as it has no bearing on your home loan interest deduction. Both can be claimed.

Try out the free HRA calculator of the income tax department to determine your HRA exemption. This calculator shows you on what part of your HRA you have to pay taxes – i.e. how much of your HRA is taxable and how much is exempt from tax.

When Do You Need Landlord’s PAN?

If you have taken a house on rent and are making a payment in excess of Rs 1 lakh annually – remember to provide the landlord’s PAN. Else, you may lose out on the HRA exemption. Landlords without a PAN must be willing to give you a declaration refer to circular No. 8/2013 dated 10 October 2013.

Tenants paying rent to NRI landlords must remember to deduct TDS of 30% before making the payment towards rent.

What to do if my Employer Doesn’t Provide me With HRA?

If you pay rent for any residential accommodation occupied but do not receive HRA from your employer, you can still claim the deduction under Section 80GG.

Conditions that must be fulfilled to claim this deduction:

  • You are self-employed or salaried
  • You have not received HRA at any time during the year for which you are claiming 80GG
  • 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 the 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.

How to Claim Deduction Under Section 80GG?

The least  of the will be considered as the deduction under this section:

  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).

How to Claim HRA When Living With Parents?

Let’s understand this with an example.

Deepak works in an MNC in Delhi. Though his company provides him HRA, he lives with his parents in their house and not in rented accommodation. How can he make use of this allowance?

Deepak can pay rent to his parents and claim the allowance provided. All he has to do is enter into a rental agreement with his parents and transfer money to them every month.

This way Deepak can make a nice gesture to his parents while saving on taxes. His parents will have to show the rent he paid on their income tax returns. However, they can save a lot as a family.

Frequently Asked Questions: Click here

 
 
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TaxClue Teamhttp://taxclue.in
Taxclue is an online news portal for reporting all news, articles, judgments, Circulars, orders, and notifications relating to various corporate and tax laws in India. We use the tagline ‘Simplifying Laws’. Our mission is to Simplify the Laws and make people aware of their rights and duties in relation to tax matters in order to equip them to participate in nation-building.

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