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How to Save Tax on HRA (House Rent Allowance)?

24-June-2021 |

Availing tax* benefits are a great way to plan your finances to save money for your long-term commitments. There are varied provisions in the Income Tax Act, 1961 that provide tax benefits. Saving tax on House Rent Allowance(HRA) is one among them. If you are a salaried person, HRA can be a part of your salary structure. So, what is HRA, and how to save tax on it? Let us get into the details.


 

What is HRA?

House Rent Allowance is a benefit many employers offer as part of the salary structure provided to their employees. Unlike the basic salary, the HRA component is not taxable and qualifies for tax exemptions under Section 10(13A). However, this benefit applies to employees who are living in rented accommodation by paying rent regularly. And, it is fully taxable for employees living in their own house or living in a place without paying rent. Therefore, the HRA exemption amount is deducted from the total income to derive the gross taxable income, saving tax.

 

 

Who Can Save Tax On HRA?

Saving tax on HRA is permissible for salaried individuals paying rent for their accommodation and not allowed for self-employed professionals. Also, it is an option available with taxpayers choosing the old tax regime.

From FY 2020-21, the government allowed a taxpayer to choose between the new tax regime and the old tax regime. Therefore, if you have opted for the new tax regime in FY 2020-21 or FY 2021-21, then the tax exemption on HRA is not applicable.

It is also important to note that tax-saving on HRA is available for the taxpayer only until the rented accommodation is occupied. Therefore, taxpayers have to ensure that they secure the rent agreement and all the rent receipts. And, if the taxpayer is paying a tax of more than ₹1,00,000 as rent, then the PAN card of the owner has to be reported to the employer.  


 

What Amount of the HRA is Tax-Exempted?



For the calculation of income tax savings on HRA, you can consider the basic salary. However, if there is a Dearness Allowance(DA) component and a commission based on the increased sales turnover, they have to be added to the basic salary. And, it is the minimum of

  1. Actual HRA

  2. 50% of the salary received if present in metro cities and 40% of the salary if present in non-metro cities, and

  3. Excess of the rent paid annually over 10% of the annual salary. 


 

Special Considerations on HRA Tax-Saving

 

There are a few special cases while availing of the tax exemption on HRA. Let us discuss them going forward:

  1. Staying at a rented accommodation of a family member - If you are staying in a house owned by your parents and paying rent regularly based on an agreement, you can avail of the benefit. The same is applicable if you are paying it to any other family member other than your spouse. Ensure to keep a record of the banking transactions between you and the family member if there is a query by the tax officials related to the genuineness of the tax benefit claim.

  2. Owning a house while staying in a different place - If you have your own house for which you have availed of a home loan and rented out because you are staying in a different city, the tax exemption on HRA is still applicable. It is important to note here that the tax deduction applicable on repayment of the home loan and interest paid also stands valid in such cases.


 
Calculation of Income Tax Saving on HRA

 

Here is an example of HRA calculation. Consider an individual furnishing the following information.

Monthly Basic Salary

₹20,000

HRA

₹8,500

House Rent in a non-metro city

₹9000



To avail of the tax benefit, the minimum of the following computation should be considered:

Actual HRA

₹1,02,000

40% of Salary

₹96,000

Excess of rent paid over 10% of salary

₹1,08,000 – ₹24000 = ₹84000

 

Therefore, ₹84,000 from the total HRA of ₹1,02,000 will be tax exempted and the remaining ₹18,000 will be added to the total income for tax calculation.

If you are an individual paying rent but not a salaried individual or do not have HRA as part of your salary, then you can avail of tax exemptions under Section 80(GG) of the Income Tax Act.

Saving tax is considered a smart financial decision as it can assist in securing your financial future. The government has introduced such provisions to help you invest and save tax systematically. There are many other ways to reap similar benefits. For instance, you can buy a savings policy with life cover to save on tax* simultaneously.


Tata AIA life insurance saving plans provide varied features to enhance your financial position at different stages in your life. The savings insurance plan provides the flexibility to receive the payout as a regular income based on the preferred income period between 20 to 45 years on maturity. As the payout is guaranteed1, you can make a definite financial plan if you plan to retire early or otherwise.

 

 

Conclusion

Tax exemption on HRA is a valuable benefit in the hands of any salaried individual. We have seen what HRA means, who can avail it, and how to calculate it easily. Ensure to hold all the proof of evidence while availing such tax exemption to avoid any discrepancies in the future. So, be informed, understand the tax provision, and save tax on HRA!

 

L&C/Advt/2022/Feb/0238

 

Looking for a financial solution to save tax? Speak to our expert

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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