Everyone who earns an HRA allowance must file income tax returns if they wish to save money spent as income tax against house rent expenses. If you don’t file the ITR, your employer might charge you an extra TDS resulting in higher taxes. Only through filing ITR can you remove this surplus payment of taxes.
But to file the ITR to get the maximum benefit, you must know what HRA Exemption is in income tax. It will help you understand the applicable rules in your case and claim the maximum HRA exemption limit. Here, you will learn about HRA tax exemption in detail and the related rules and regulations.
What is HRA (House Rent Allowance)?
HRA or House Rent Allowance is a component in the total salary, along with basic salary, dearness allowance, travel allowance, GPF/EPF, ESIC, professional tax, and several other taxes and allowances. Like other allowances, HRA is also applicable for a sole purpose, i.e., paying rent for a house in the city or place where you work. HRA constitutes around 10% – 15% of the total salary and is fully taxable unless you live in a rented house.
The Income Tax Act of India provides several exemptions against this HRA. So you can claim relaxations against these payments. However, you can only claim an exemption if you file ITR based on the old tax regime. The new tax regime has higher tax slabs, so they don’t allow claiming some relaxations such as HRA. People still prefer the old tax regime for its several tax relaxations.
Alt-text: Graph showing the total tax revenues as a share of the total GDP during 1981 – 2018.
As you can see from the above graph, the total tax revenue compared to GDP is currently 17.035, which is not as much as it should be. It is also evident that the figures as a share of GDP are not seeing significant fluctuations in the past years. Part of the reason behind it is the increasing tax relaxations and people’s knowledge of claim relaxations.
Even though income tax payments are steadily increasing, the number of taxpayers in India constantly decreases. The primary reason behind this phenomenon is the rising relaxation claims. HRA is one of the most prominent relaxations when it comes to salaries. HRA exemptions can reduce the taxable income for borderline taxpayers, thus making them ineligible to pay taxes. To take benefit of such relaxations, you must know about HRA tax exemption in India.
HRA Tax Exemption for the Self-employed Individuals
Self-employed and variable-wage-earning people can also benefit from other HRA exemption sections in the IT act. One such HRA exemption rule that benefits variable-income individuals is Section 80GG. Given below are the criteria to calculate the maximum permissible HRA tax exemption.
- INR 5,000 per month (INR 60,000 per year).
- 25% of the adjusted total income.
- The annual rent after taking away 10% of the adjusted total income from it.
Let us understand this with the example of Sunita, who is a self-employed individual. She earned a total adjusted income of INR 4,30,000 in the FY 2020-21. The annual rent she paid for her rented house was INR 80,000. She can find out the maximum permissible tax exemption by applying the formula in the below table.
|Sr. No.||Condition||Calculation||Final Amount (INR)|
|1||5,000 per month||5,000 x 12||60,000|
|2||25% of adjusted total income||25% of 4,30,000||1,07,500|
|3||Actual annual rent – 10% adjusted total income||80,000 – (10% of 4,30,000)||37,000|
|Least Amount||37,000 (Sr. No. 3)|
The least amount among these is INR 37,000. So Sunita can claim a maximum HRA tax exemption up to INR 37,000 in FY 2020-21.
- Definition of HRA and its importance in reducing taxable income.
- HRA exemption rules for salaried and self-employed individuals.
- HRA calculation as per different sections of the Income Tax Act.
- Eligibility criteria and documents are necessary for claiming HRA exemption.
HRA Tax Exemption for the Salaried Individuals
If you are a salaried individual, then the HRA exemption rule applicable in your case is Section 10(13A) of the Income Tax Act, 1961 of India. As per these rules, the maximum permissible tax exemption depends on the following criteria.
- Actual annual HRA.
- 50% of your annual basic salary if you reside in a metropolitan city or 40% of the basic salary for other places.
- The actual annual rent after taking away 10% of the basic salary from it.
The maximum permissible HRA tax exemption is the least amount in these conditions. Let’s understand this scenario with the example of Kumar, who is a salaried employee. Kumar earns an annual salary of INR 3,60,000. The basic salary and HRA allowance within that salary are INR 2,40,000 and INR 1,00,000.
Kumar moved from another city into a metropolitan city for his job and lives in a rented house with an annual rent of INR 1,00,000. We can use the above criteria to determine the maximum permissible HRA exemption limit.
|Sr. No.||Condition||Calculation||Final Amount (INR)|
|1||Actual annual HRA||1,00,000||1,00,000|
|2||50% of basic salary + DA||50% of 2,40,000||1,20,000|
|3||Actual annual rent – 10% of basic salary + DA||1,00,000 – (10% of 2,40,000)||76,000|
|Least Amount||76,000 (Sr. No. 3)|
Out of all the three final amounts, INR 76,000 is the least. So Kumar can claim relaxation of a maximum of INR 76,000 as per the HRA exemption Section 10(13A).
Advantages of HRA
The major advantage of the House Rent Allowance is that it provides the course of action to scale down taxable income.
To meet the inflating costs of living in rented properties, employers now have a provision to wage House Rent Allowance for their employees. It is considered to be a constructive tool to optimize tax liability, therefore helping honest taxpayers to fulfill their legitimate needs.
How is Tax Exemption From HRA Calculated?
Your HRA can be calculated from the factors given below:
- The actual rent is paid by subtracting 10% of your basic salary.
- The actual amount of HRA given to you.
- 50% of your basic salary (for a metropolitan city).
The minimum figure of these three is the HRA, where claims for tax deductions can be made.
HRA is a chunk of a taxpayer’s salary that reduces his/her tax liability if the person lives in rented housing. Using online HRA Deduction Calculators, HRA rebates can be determined.
It is also an option to calculate the HRA rebate yourself manually. You can check out the HRA calculator on the income tax India website. In this line, there should be a hyperlink adjoined to the word HRA calculator.
If the employee pays more than ₹1,00,000 in rental expenses yearly, they must provide their landlord’s PAN number whilst filing tax returns. Moreover, if an employee pays rental expenses but does not get HRA as a part of their salary, or if the person paying rental costs does not have income earnings, the advantages of paying rental costs can be claimed as per Section 80GG or the HRA exemption section.
How to Claim HRA When Living With Parents?
A person living in her parents ’ house can pay rent and claim an exemption for the HRA, handed the parent owns the property. Indeed in the loftiest 30 brackets, the arrangement makes sense because there’s a 30 standard deduction on rental income. One can claim an exemption for a yearly rent of over Rs,000 under Section 80GG. Of course, the rent entered by the parent will be subject to tax.
Point to note If the rent exceeds Rs 1 lakh a year, one has to furnish the PAN number of the landlord while claiming an exemption for HRA. However, he must submit a protestation to this effect, If the landlord doesn’t have a PAN. The taxpayer must have evidence of the sale. Also, you can not pay rent to your partner or minor child and claim an HRA exemption.
How to Claim House Rent Deduction Under Section 80GG?
80GG is a section under the Income Tax Act of India where an individual can claim a deduction on the rent paid towards furnished or unfurnished homes. The house must be their residential accommodation.
Conditions that you need to meet–
- An individual can claim a deduction under this section if he/she is a self-employed or salaried individual who does not have the HRA component in his/her CTC.
- Companies cannot claim deductions under this section for their rental expenditure.
- You being an individual, are only entitled to receive this deduction.
- If you are salaried, you must not be receiving any HRA or RFA benefits, and you are not even entitled to receive so to avail of the benefit of section 80GG.
- You can claim deduction under this particular section on any kind of residential premise which is unfurnished or furnished, where you are a tenant.
- If the taxpayer gets any kind of similar deduction in that assessment year, then he or she cannot get a deduction under this 80GG section.
To fill a valid claim under section 80GG, you must submit Form 10BA online. Moreover, you need to claim it in the income tax return filed.
Avail Tax Benefits on your Home Loan as well as HRA?
You can claim HRA if you admit it as a part of your compensation. Still, you need to live in rented accommodation to claim HRA. As you’re staying at the house, you have profited on a home loan, and you work in the same city, you can not claim HRA tax benefits. Still, you can claim the income tax deduction on the home loan for principal and interest payments as you have taken the power of the property.
How to make HRA Claim?
After ensuring that you follow all the rules in the HRA exemption sections, you can move ahead with the process to claim HRA.
Sometimes you won’t prefer the HRA exemption limit provided in the form-16 because you pay a higher rent than the allowance. If you want to claim a higher exemption for a higher actual rent, you can submit the proof documents while filing the ITR.
There are two methods to claim HRA. The first one is through the form-16 that your employer provides you. It mentions the HRA what they provide you and if it is the entire sum you require. If you are satisfied with the amount, you don’t need to do other processes and fill it with your ITR.
These documents validate your claim for a higher relaxation. Below are the necessary documents you should keep ready while manually submitting the proof of rent.
- Rent agreement
- Rent payment receipts
- Landlord’s PAN (In case PAN is not available, a self-declaration and duly filled form 60 is necessary)
Now you must have a clear understanding of the HRA exemption sections in the IT Act. It will help you substantially and legally reduce your tax burden. You can increase your HRA exemption limit through the calculation and rules provided here if you manage a few features of your rent arrangements. Apply these the next time you file ITR to make the most of the government’s relaxations.
HRA exemption is the relaxation that the Income Tax Act provides taxpayers against their HRA component of the salary. If they are eligible per the rules and regulations, they can get this relaxation and reduce their income tax burden.
Everyone who earns an income from salary or self-employment and lives in a rented apartment is eligible for HRA exemption. But they have to prove their claim and adhere to a few criteria set forward by the IT Act.
HRA exemption sections in the Income Tax Act are 10(13A), 80GG, and the rules in 2A. Applying these sections to your eligibility will help you gain maximum benefits from the exemption.
The HRA exemption limit for salaried individuals is the least amount of the following three conditions:
50% of the total basic salary and DA if you reside in a metropolitan city. Otherwise, 40%.
Total rent is subtracted from 10% of the basic salary and DA.
No. You cannot claim the exemption if you own a house. However, if you are paying off your home loans while living on rent somewhere else, you can claim this exemption and also other exemptions for having a home loan.
Yes. HRA depends on the city where you live. Moving from a non-metro city to a metro would change from 40% to 50% of your basic salary.
Yes, you can avail of tax exemption under HRA along with a home loan.
Yes, you are eligible to pay rent to your parents and collect a receipt for the HRA claim.
The city of residence will be considered for HRA calculation and not your city of work.
Read More: How to Pay Self-Assessment Tax