House Rent Allowance: helps a salaried person to save tax

Last Updated On: July 25, 2020, 12:59 p.m.
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HOUSE RENT ALLOWANCE

House Rent Allowance (HRA) is an allowance paid by employers to their employees as compensation for the rent they pay for residing at homes situated at their workplace.

HRA is considered to be a portion of salary and is added in the salary structure to help the individual to save tax. Subject to certain conditions, a part of HRA is exempted under section 10(13A) of the Income Tax Act,1961.

The amount of HRA exemption is deductible from the total income before arriving at a taxable income.

Who can avail HRA?

This tax benefit is available only to the salaried individuals who have the HRA component as part of his salary structure.

Who cannot avail of HRA?

Self-employed professionals cannot avail of the deduction.

 

Conditions to claim House Rent Allowance (HRA):

  • The allowance must be specifically granted to the employee by his employer to meet expenditure actually incurred on payment of rent in respect of residential house occupied by the assessee.
  • The employee should not be the owner of the residential house occupied by him.
  • The employee must have actually incurred expenditure on payment of rent.
  • The relationship between the employee and the employer is very important.


 

Exemption for HRA Benefit:

  • Actual HRA received
  • 50% of the salary if living in metro cities, 40% of the salary if living in non-metro cities.
  • Excess of rent paid annually over 10% of the annual salary.

 

How to claim HRA Exemption while Filing ITR:

To claim HRA exemption you have to submit the HRA documents necessarily.

  • In case, if you have not submitted the required documents to your employer, your Form-16 will show the HRA portion of your salary to be fully taxable. That means the taxable amount of your salary will be higher than the calculations made by you.
  • The CBDT notifies that you should also give the details of the income received by you that are exempted from tax.

 

House Rent Allowance Computation:

 While Computing HRA, Salary means basic salary it will not include other perquisites and allowances. It includes dearness allowance.

Let us understand it with a simple example:

Mr. X resides in Delhi, gets Rs.6,00,000 as a basic salary. He receives Rs.1,70,000 as HRA. Rent paid by him is Rs.1,80,000. The amount of exemption is calculated as follows:

House Rent Allowance = Rs. 1,70,000

50% of the basic salary= Rs.3,00,000

Rent paid minus 10% of the salary= Rs. 1,20,000

The least of the above is admissible exemption i.e Rs.1,20,000.

 

Documents Required for claiming HRA Exemption:

The HRA exemption benefits can be availed only by submitting the rent receipts or the rent agreement with the house owner.

Note: It is mandatory for the employee to report the Pan Card of the 'landlord' to the employer if the rent paid is more than Rs 1,00,000 annually.
 

Special Scenarios in claiming HRA tax benefits:

1. Paying rent to family members:

If you are staying with your parents and paying rent then, you can claim that for tax deductions as HRA. But you cannot pay rent to your spouse as you are sharing a relationship, you are supposed to take the accommodation together.

If you are renting the house from your parents, make sure you have documentary evidence as proof that financial transactions regarding your tenancy take place between you and your parent.

Keep a record of banking transactions and rent receipts because your claim can get rejected by the tax department if they are not convinced by the authenticity of the transactions.

2. Owning a house  but staying in a different city
One can avail the simultaneous benefit of deduction available for the home loan against 'interest paid' and 'principal repayment' and HRA in case your own home is rented out or you work in another city.

Individuals who don't get HRA but pay rent. There may be some employees who might not have an HRA component in their salary structure. Also, a non-salaried individual might be paying rent. For them, Section 80 (GG) of the Income-tax Act offers help.

An individual paying rent for a furnished/unfurnished accommodation can claim the deduction for the rent paid under Section 80 (GG) of the I-T Act, provided he is not paid HRA as a part of his salary by furnishing Form 10.

 

Conditions:
 

  • While claiming a tax deduction, one must remember that the individual himself or his/her spouse, or minor child, or as a member of the Hindu Undivided Family (HUF) must not own any accommodation.
  • If the individual owns any residential property at any place and earns rent from it then no deduction is allowed.
  • One can avail the simultaneous benefit of deduction available for the home loan against 'interest paid' and 'principal repayment'.

 


 

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