HRA : House Rent Allowance

HRA full form stands for House Rent Allowance (HRA). It is a component of most workers’ pay packages. It is one of the crucial salary components for which deductions are fully/partially taxable under Section 10(13A) of the Income Tax Act. Let's understand more about the HRA component here.

What is HRA (House Rent Allowance)

House Rent Allowance is an allowance given by an employer to an employee to cover the cost of living in rented housing. 

HRA is not entirely taxable, even though it is a part of your salary. A portion of HRA is excluded from taxation under Section 10 (13A) of the Income Tax Act of 1961, subject to some provisions.

Until calculating taxable income, the sum of HRA exemption is deducted from the overall income, which allows an individual to save money on taxes.

However, bear in mind that if an employee lives in his or her own home and does not pay rent, the HRA collected from his or her employer is entirely taxable.

Who can avail of HRA?

This tax incentive is only applicable to salaried people who have an HRA portion of their pay structure and live in rental housing. The allowance is not available to self-employed workers.

HRA for the Self-Employed

As per the Income Tax Act regulations, self-employed individuals cannot claim HRA, but they certainly can avail of tax deductions towards the rented housing under Section 80GG.

HRA for Salaried Individuals

According to Section 10 (13A), rule number 2A of the Income Tax Act, salaried individuals can claim exemptions for HRA.

How to Claim HRA Exemption

For an individual to claim HRA exemption, he/she must meet the below-listed conditions:

  • Live in rented housing
  • Receive HRA as part of the CTC (Cost To Company)
  • Provide correct rent receipts and also proof of rent payments

Note that the HRA exemption calculation will be based on different aspects such as salary, HRA received by the employee, rent paid, city of residence, etc.

How to Calculate HRA Exemption

The lowest of the following can be claimed by an individual as an HRA exemption:

  • Actual HRA received
  • Actual rent paid (-) 10% of basic salary + Dearness Allowance
  • 50% of [Basic Salary + Dearness Allowance] for those living in metro cities (Delhi, Mumbai, Kolkata, Chennai)
  • 40% of [Basic Salary + Dearness Allowance] for those living in non-metros

Example of HRA Calculation

Consider the situation of Mr. Shiva, a salaried person who lives in Mumbai. He pays a monthly rent of Rs.10,000 for his leased accommodation. This equates to Rs.1.2 lakh per year. His monthly earnings as seen in the table below:

Per month, he has a PF of Rs.2,000 and a technical tax of Rs.200 deducted from his pay.

In Mr. Shiva’s case, the tax-free portion of his HRA will be the lowest of the following, based on his annual earnings:

Basic Salary Rs.30,000
HRA Rs.13,000
Conveyance Allowance Rs.2,000
Special Allowance Rs.3,000
Leave Travel Allowance (LTA) Rs.5,000
Total Earnings Rs.53,000

Mr. Shiva will receive Rs.84,000 in tax exemption on HRA since it is the lowest value above. The remainder of his HRA will be taxed according to his income tax bracket.

Actual HRA element of salary: Rs.13,000 into 12 = Rs.1.56 lakh
50% of basic salary, as he stays in Mumbai: 50% into Rs.30,000 into 12 = Rs.1.80 lakh
Actual rent paid minus 10% in basic salary: (Rs.10,000 into 12) – (10% into Rs.30,000 into 12) = Rs.1.2 lakh – Rs.36,000 = Rs.84,000

Documents Required for HRA Deduction

Here is the list of documents required for HRA exemption-

  • An employee is required to furnish PAN card details and a copy of the landlord/property owner if the rent paid during the given financial year is more than Rs1,00,000 in order to claim HRA tax exemption.
  • The receipts of rent paid by the employee. Note that the receipts should include the Date and Name of the landlord, PAN card details of the landlord, Name of the tenant, Address of the rented house, Duration of stay, revenue stamp, Signature of the landlord on the revenue stamp, etc.
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