What is HRA?

House Rent Allowance (HRA) is a component of most workers’ pay packages. 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.

Tax Exemption from HRA

The sum that should be deducted is the least of the following:

  1. The actual HRA received;
  2. 50% of [basic salary+DA] for the ones living in metro cities [40% for non-metros];or
  3. Actual rent paid less than 10% of basic salary + DA    

Who can avail 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.

Special HRA Claims

  1. Rent Payment to Family Members

The individual seeking the tax exemption cannot own the rental premises. So, if you live with your parents and pay the rent, you can say HRA as a tax deduction. You, on the other hand, are unable to afford your spouse’s rent. Since you are expected to take the housing together in terms of your friendship. As a result, the Income-tax Department will scrutinize these transactions.

And if you are renting the house from your parents, make sure you have documentary evidence that your tenancy involves financial transfers between you and your parents. So keep track of your financial transactions and rent receipts because the tax department may deny your argument if the transactions’ validity is questioned. The Mumbai income tax appellate tribunal recently dismissed a salaried taxpayer’s HRA petition because the claim did not seem valid to the tax officials.

  1. Own a House, but Staying in a Different City – 

If your own home is leased out or you live in another place, you will take advantage of the simultaneous value of a discount for the home loan against ‘interest charged’ and ‘principal repayment’ as well as HRA.

How to Calculate HRA?

HRA is an essential part of a person’s compensation package. The cumulative amount allocated by the employer for the employee’s housing is referred to as rent. The sum set aside for HRA is useful to employees when it is used to measure tax deductions for a certain fiscal year. HRA will also help you save money by lowering your taxable taxes.

Invest in elss funds

The tax incentives associated with HRA are only available to salaried people who live in rented housing. An employee who lives in his or her own home is not entitled to report the balance as a tax deduction.

HRA is calculated based on a variety of considerations, including the employee’s right to 50% of his or her minimum wage if he or she lives in a metro city and 40% if he or she lives in either of the other cities. The following three provisions are taken into account when calculating HRA for tax purposes:

  • The real rent does not exceed 10% of the minimum wage.
  • If you live in a metro, you will receive 50% of your minimum wage, and if you live in a non-metro area, you will receive 40%.
  • The HRA number that the employer has allotted.

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

Benefits of HRA

  • The real rent you pay must be less than 10% of your monthly salary.
  • The sum of HRA that your boss has given you.
  • If you live in a metro, you’ll get 50% of your base income, and if you live anywhere, you’ll get 40%.

Required Documents

Leasing certificates and rental agreements are the most important documents to include when requesting a tax deduction for HRA. And if you pay rent to your parents, as a taxpayer, you will be liable for this deduction.

To get a tax deduction on HRA, you’ll need to apply your rent receipts as a taxpayer. In situations where the annual rent of the housing unit reaches Rs.1 lakh, the landlord’s/PAN landlady’s must also be given. If the landlord/landlady does not have a PAN passport, he or she should have a self-declaration with the same information.

HRA – House Rent Allowance FAQs

Q1. Can I claim HRA for more than one house?

No, HRA is only issued for one rental house in the city where the employer is located.

Q2. Can HRA be claimed when living in your own house?

If you live in your own home, you would not be eligible for HRA.

Q3. Will I be entitled to HRA if I own a home but live in another city and work as a salaried employee there?

If you own a home but are required to live in a different city due to your work, you can only receive HRA benefits if you are renting.

Q4. Is it possible for a husband and wife to say HRA for the same home?

Yes, both the husband and the wife will claim HRA for their respective shares, but the cumulative rent claimed by both of them cannot exceed 20,000.

Q5. Can maintenance charges for the apartment be included for HRA tax exemption?

No, the HRA exemption is only available for rent-paying. You won’t be able to subtract repairs or fuel costs from the taxes. These fees are often not taken into account when determining the landlord’s income tax.