When a better employment opportunity comes, you should never worry about relocating to another location. It would be best to accept these job shifts and the following promotions to grow in the career. But sometimes, moving into a new location always means living on rent, and this rent can become an extra liability for you, especially if you are a taxpayer.
In such situations knowing what is HRA in your salary will help you reduce the tax burden of income tax. It is also helpful for people who don’t have HRA and still want to claim exemption on it. Here you will know everything about what is HRA, its exemption, its calculation, and how to claim HRA in different scenarios.
- HRA or House Rent Allowance is what employers pay their employees for the expenses of renting houses.
- There are HRA exemptions in the Income Tax Act of India, which reduces the income tax amount of taxpayers.
- You can claim HRA based on a few fixed and variable income criteria through Sections 10(13A) and 80GG, respectively.
You would know what is HRA allowance if you closely paid attention to the details in your salary slip. HRA, an abbreviation of House Rent Allowance, is the allowance that an employer pays their employees within the salary to meet house rent expenses. It is one of the several components of the total in-hand salary, such as basic salary, DA, TA, PF, professional tax, ESIC, etc. HRA comes under the allowance category, so it is an extra income in the total salary, unlike the taxes, which are expenses.
As all provident funds deduct money based on the amount of basic salary and DA, you as an employee always benefit from HRA being a separate component. There are no extra deductions on the HRA, apart from income tax. And if you follow a few steps, you can reduce or even remove the taxes on HRA. So, you must know what is HRA as it allows claiming exemptions on it and fully utilizing HRA for its actual purpose.
However, claiming exemption and reducing taxes on HRA is only possible in the old tax regime in India. You cannot claim any relaxations in HRA if you file ITR as per the new tax regime in action since FY 2020-21, i.e., AY 2021-22. But in the new tax regime, you get an increased income tax slab, which sometimes makes claiming exemption on HRA redundant.
What is HRA Exemption and how to Calculate It
After knowing what is HRA in salary, we will now move forward with HRA exemption and its calculation. In India, every taxpaying salaried employee can claim a tax deduction for the rent expenses based on the HRA as per Section 10(13A) of the Income Tax Act, 1961.
As per the International Labor Organization database, the World Bank affirms that the percentage of people with fixed wages and salaries steadily increased and reached 53.641% in 2019. And the same database reports that almost 24.17% of the Indian population gets income from salaries and wages. It means for every 10000 employed people in India, 2417 have their salaries independent of the company’s performance or sold products.
Knowing what is HRA and how to claim it will be helpful for everyone who is a taxpayer among these people. But there are some conditions on the maximum allowable HRA deduction. The maximum allowable amount of HRA deduction is the least of the following three criteria.
- Total HRA that you get.
- 50% or 40% of the total basic salary and DA based on the city where you live as a renter (50% for metropolitan cities and 40% for other places).
- 10% of the total basic salary and DA subtracted from the rent you pay.
Whichever amount is the least from the above-mentioned is the maximum limit you can claim an exemption. To understand what is HRA exemption in detail, let us consider an example. Shruti is a salaried employee with a monthly salary of INR 30,000, which has INR 10,000 as a basic salary, INR 5,000 as DA, and INR 8,000 as HRA. She has to pay a rent of INR 10,000 per month in a metropolitan city. So based on this, let us create calculations for all three criteria mentioned earlier.
|Sr. No.||Condition||Calculation (Annual Amounts)||Amount (INR)|
|1||Total HRA||(8,000 x 12)||= 96,000|
|2||50% of basic salary + DA||50% of (15000 x 12) = 50% of 1,80,000||= 90,000|
|3||Rent – 10% of basic salary + DA||(10,000 x 12) – (10% of (15,000×12)) = 1,20,000 – 18,000||= 1,02,000|
Among all three final amounts in the criteria, the least amount is INR 90,000. So, Shruti can claim a maximum HRA deduction of 90,000 in her income tax filings.
Did You Know?
You can also claim tax deductions for HRA even when you are living with your parents. You will have to furnish a rent agreement and the payment receipts for claiming the deduction in these cases. And as long as the total amount of rent earned by them is less than INR 1 lakh, you don’t need to provide their PAN details in the ITR. But if the amount exceeds INR 1 lakh, you will have to provide their PAN details. They will also have to pay taxes on the income if it is more than their applicable tax slab.
How to make HRA Claim?
To claim HRA exemption, you must be an ITR filing taxpayer. You can claim a deduction under section 10(13A) and rule 2A for your maximum allowable HRA exemption while filing the taxes. There are mainly two approaches you can adopt: the first one applies when the HRA you get is your actual rent expense, and you are okay with the amount. You can directly submit a copy of your Form-16 received from the employer in such cases.
In the second case, the actual rent expenses are more than the HRA. Here you have to fill in the rent details and provide related documents to claim exemption on the surplus. The primary documents to provide during the claim procedure include the rent agreement, rent receipts, and the landlord’s PAN details if the rent is more than INR 1 lakh a year.
Things to Remember for Claiming HRA Deduction
If the landlord doesn’t have PAN, then you can submit a self-attested declaration of the landlord stating they don’t have a PAN.
The rent payments receipts also need to be of bank or cheque transfers. Cash payments up to INR 5,000 are admissible without any conditions. But if the rent paid through cash is more than INR 5,000, you will also need to furnish the rent receipts with a revenue stamp.
If you, your spouse, your children, or your HUF member already has a house in the city, you cannot claim HRA exemption for rent paid towards that house or any other rented house in the same city. However, if you can prove that the distance is too long and the commute affects your work, you can claim such relaxations. But approval of such incidents is rare.
How to Claim Deduction Under Section 80GG?
HRA exemption is not only for fixed-income employees. Even employees with variable incomes where salary changes based on work parameters can claim this exemption. They can claim a similar HRA exemption under Section 80GG of the IT Act, but its criteria are different. Below are the criteria where the least amount will be the maximum allowable HRA exemption.
- INR 5,000 per month.
- 25% of the adjusted total income.
- 10% of the total adjusted income subtracted from the actual rent.
Let us understand this with an example. Amit has a job where his income is dependent on the amount of work he does. His total adjusted income for the FY 2020-21 is INR 6 lakh. He also pays a rent of INR 1,40,000 per year. The table given below will help find out what is HRA in salary for Amit.
|Sr. No.||Condition||Calculation (Annual Amounts)||Amount (INR)|
|1||INR 5,000 per month||(5,000 x 12)||= 60,000|
|2||25% of adjusted total income||25% of 6,00,000||= 1,50,000|
|3||Rent – 10% of adjusted total income||1,40,000 – 10% of 6,00,000||= 80,000|
Based on these figures, criteria Sr. No. 1 is the lowest, so Amit can claim a maximum HRA exemption of INR 60,000 for FY 2020-21.
Word to Remember
Adjusted Total Income – Adjusted total income is primarily applicable for people with varying salaries, depending on their work or service. The total adjusted income will subtract deductions from all the sections, the relaxation sections, and the capital gains from the sum of all the incomes per the Income Tax Act.
For example, Raj earns an income of INR 4,50,000 in a year with capital gains from fixed deposits and other sources summing up to another INR 1,50,000. He also pays INR 1,00,000 towards life insurance, for which he can claim a deduction as per section 80C of the Income Tax Act. So, Raj’s adjusted total income, ATI, is INR 2,00,000.
ATI = Total income – capital gain incomes as mentioned in sections in Income Tax Act – Deductions made from sections in Income Tax Act
= 4,50,000 – 1,50,000 – 1,00,000
= INR 2,00,000
We went through what is HRA allowance, its exemption, its calculation, and different modes and scenarios of how every taxpayer can benefit from it. You must benefit from this beneficial deduction in the Income Tax Act as it will help you substantially reduce your tax burden. After that, you can use the saved money for other essential expenses and occasions in life.
HRA means House Rent Allowance. It is one of the several allowances that an employer pays their employee. HRA is also an allowance with a tax exemption for most employment taxes and provident funds. And in the case of income tax, you can claim HRA deductions based on sections 10(13A) and 80GG while adhering to Rule 2A of the Income Tax Act, 1961.
The primary benefit of HRA in salary is that you don’t have to pay taxes on it. For example, provident funds usually deduct taxes on the basic salary and DA and not HRA, so you get that total amount and can use it for paying rent.
HRA exemption claiming process is the steps you take to claim exemption on HRA based on the maximum allowable amount. It involves filling and submitting forms and rent-related documents in your ITR.