What is HRA and how to calculate HRA exemption?
If you have worked for any company and received a salary, you would have come across an HRA component in your salary slip. HRA stands for House Rent Allowance and comes under Section 10 (13A) of the Income Tax Act of 1961.
But very few of you know that this HRA can actually be claimed as HRA exemption under section 80GG as per the income tax rules. Let’s understand what HRA is, how it is calculated, and what are these exemptions.
What is HRA?
House Rent Allowance is basically the amount paid in the form of allowance to you by your employer to pay rent for your accommodation. What’s more interesting is that you can claim this allowance as an income tax deduction under section 80GG. Even if your employer might not be paying you HRA, you can still get the HRA tax exemption - on the condition that your accommodation must be rented but not owned. If you own the house you stay in, you cannot claim for HRA deduction even if your employer pays them as part of your salary.
How is the House Rent Allowance exemption calculated?
House rent allowance exemption is calculated based on several factors like the place of residence, the salary that is drawn, etc. The maximum HRA exemption limit for an individual living in a metropolitan city is 50% of the basic salary. In any other case, if an individual resides in any other city - the same is calculated as 40% of the base salary that is given to the individual.
What are the ways in which HRA can be calculated?
HRA calculation is done differently for a self-employed individual and a government or private employee.
HRA is calculated as the minimum of the following three, as per the HRA exemption rule in the case of a government or private employee.
The actual amount that the employer pays under the HRA.
50% of the Basic salary if living in a metropolitan city.
Rent paid minus 10% of basic salary.
Can a self-employed person claim HRA tax exemption?
Yes, a self-employed individual can also claim HRA tax exemption by filling the form 10BA, which essentially contains the rent pay details of the individual.
How is the HRA exemption calculated in the case of a self-employed person?
In the case of a self-employed individual, HRA exemption is calculated as the minimum of the following three.
Rs 5,000 per month.
25% of the total income earned by the individual.
If rent paid is more than 10% of the total income.
What documents are required for verification of HRA tax exemption?
You can submit the rent paid receipt as proof to claim tax exemption. This process sometimes also includes the submission of other documents such as the following.
Rent lease agreement.
Electricity bill, water bill.
Intimation letter that is sent to the cooperative society office regarding rental accommodation.
When do you need to submit the landlord’s pan card?
You need to submit the PAN card of the landlord if the rent payable exceeds the threshold limit of Rs. 1 Lakh. In such cases, it is mandatory to submit the PAN card of the person who is receiving the rent for verification.
What if you are paying rent to an NRI?
In the event, you are staying as a tenant in an NRI’s house and need to pay rent to him monthly. It is compulsory as per statutory requirements that TDS (Tax Deducted at the Source) of 30% needs to be deducted from the rent before paying the same to the NRI.
Special cases for HRA tax exemption:
HRA tax benefits for individuals staying with parents:
As per the income tax rules, you can avail of HRA tax exemption even if you stay with your parents at their home. Provided the house is only in the parent’s name, and you pay a monthly rent to your parents. Necessary proofs for this would be rent received, and rent paid receipts between you and your parents. You may even need to submit the bank transactions as proof during the filing of ITR.
This case does not apply if you are paying rent to your spouse, as rent paid to your spouse cannot be claimed as HRA exemption as per the tax laws.
HRA tax benefits for individuals with a home loan and staying in rented accommodation:
In this special case wherein you already have a home loan and are staying in rented accommodation, you can claim HRA exemptions pertaining to home loan and rented accommodation. Provided your home and the rented accommodation where you stay are in different cities.
If both the house and the rented accommodation are in the same city, you cannot avail of tax benefit without showing a reason for not staying in your home. This could be done by showing that your workplace is far from your home location, and hence you need to rent a place.
Some points to consider for availing of HRA tax exemption benefits:
Rent receipts are a must even if you are paying rent to your parents.
If you are staying in your own house, you cannot claim for HRA even if your employer contributes to HRA.
While filling out an ITR, bank statements stand as proof of rent payments.
Landlord’s PAN card is compulsory for any HRA tax exemption exceeding Rs. 1 Lakh.
HRA exemption is allowed under Section 80GG of the Income Tax Act when your salary does not include HRA. Whereas, if your salary includes the HRA, then you can claim for tax deduction under Section 10 (13A).
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As per Section 80C of the Income Tax* Act, premiums paid for any life insurance plan is eligible for a tax deduction.
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