HRA House Rent Allowance Calculation, Exemption and Benefits

Posted in: Taxes | on: June 23, 2020

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One of the most significant part of the salary that is paid by the employers is the House Rent Allowance (HRA) which helps the employees to meet their accommodation needs. Tax benefits for House Rent Allowance is available even for self-employed individuals.

House Rent Allowance is a salary part paid to the employees by the employer to meet their house rent expense. In an employee's salary, HRA forms the basic part. Both salaried and non-salaried individuals are applicable for House Rent Allowance.

House Rent Allowance is applicable for salaried individuals under section 10 (13A) of the Income Tax Act in accordance with rule 2A of Income Tax rules. However, self-employed individuals are not applicable for HRA exemption under this rule. Under section 80GG of Income Tax Act, they can avail tax benefits.

What are the factors that affect HRA?

Some of the factors which affect HRA calculation are,

Salary:

HRA is decided on the basis of salary. The salary is defined as the amount of basic salary, DA and other commissions. If the employee does not receive any DA or commission, the HRA will be 50% to 60% of the employee's basic salary.

City of residence:

The city in which the employee resides will affect HRA. If the employee resides in metro city, his/her HRA is equal to 50% of the basic salary. In case the employee resides in non-metro city, the HRA is equal to 40% of the basic salary.

Actual rent paid:

The actual rent paid by the employee should be less than 10% of the basic salary.

Actual HRA received:

The actual HRA amount received from the employer will be low.

How to calculate tax exemption for HRA?

Salaried individuals are exempted from income tax which is to be paid for each financial year. According to the Income Tax Act, the house rent will be calculated on the basis of the least of the following three components.

  • Actual HRA received from the employer
  • 50% of basic salary for employees residing in metro city and 40% for employees residing in non-metro city
  • Actual rent paid 10% less of basic salary.

Take, for instance, an employee residing in Chennai earns a monthly salary of Rs. 30,000.

  • If he resides in an apartment for a monthly rent of Rs. 10,000, he is eligible for HRA equal to 50% of the basic salary.
  • The company will provide Rs. 13,000 per month as HRA.
  • 10% of the yearly basic salary equals to Rs. 36,000.

Under the following factors, the HRA will be calculated as given below.

Basic Salary Rs. 30,000
House Rent Allowance (HRA) Rs. 13,000
Conveyance Rs. 3000
Special Allowance Rs. 2000
Medical Expenses Rs. 1250
Leave Travel Allowance (LTA) Rs. 5000
Total Earnings Rs. 54,250

A deduction from the salary will be made for each month in the form of PF contribution for Rs. 2000 and Professional Tax for Rs. 200.

  • The annual HRA amount received from employer is Rs. 13,000 x 12 = Rs. 1,56,000
  • Actual rent paid will be less than 10% of the basic salary = (Rs. 10,000 x 12) - Rs. 36,000 = Rs. 84,000.
  • 50% of basic salary for residing in metro = Rs. 1,80,000

From the above calculation, it is clear that only the HRA amount of Rs. 84,000 will be exempted from tax as it is the least among the three amounts on calculation above.

What are the HRA Rules?

Some of the important rules related to House Rent Allowance (HRA) are given below.

  • You will be allotted HRA not more than 50% of your basic salary.
  • You can also avail tax benefits for your HRA along with home loan.
  • To avail HRA benefit, you need not to pay rent only to landlord. To claim HRA exemptions, you can pay to your parents and show relevant receipts.
  • You cannot claim HRA exemption by showing the receipt for the rent you have paid to your spouse. It is not applicable under Income Tax law.
  • In order to avail the benefit of tax exemption, you need to submit rent receipts.
  • To make relevant tax deductions from the income from property, the PAN card details of the landlord should be furnished.
  • If the rent paid exceeds one lakh rupees per year, the PAN details of the landlord are needed.
  • If your landlord is an NRI, you should deduct 30% tax from the rent amount.
  • An employee is not exempted from income tax for the HRA received if he/she is residing in his/her own house.

What are the documents required to claim tax exemption on HRA?

In order to claim for tax exemption on HRA, the following documents are required.

  • PAN card of the landlord if the rent paid exceeds one lakh rupees per annum
  • Rent receipt
  • If needed, copy of rent agreement.

How to claim for tax exemption on HRA?

To claim for tax exemption on House Rent Allowance, you need to submit the rent receipts and PAN details of your landlord if the rent paid exceeds one lakh rupees per financial year. If the landlord does not have PAN card, the Income Tax department uses various ways to verify the details provided by the tax payer.

How to avail tax benefits for HRA along with home loan?

As long as you are paying rent for your residence, you can avail tax benefits on HRA. If you have rented your own home and residing in a house by paying rent, you can avail HRA along with home loan. In such cases, the government will deduct tax according to your rental income or income from property.

You cannot claim for tax exemption if your owned and rented property belongs to the same city. However, you can claim for tax exemption on both HRA and home loan if your owned property is far from your work place and thus the rented residence has been availed.

What are the features of HRA in Union Budget?

In the Union Budget 2019-20 held on 1 February 2019, the interim Finance Minister Piyush Goyal announced tax exemption for middle class people, affordable housing and modernization of defence sector. There was a high expectation among the public and home market regarding tax exemption on HRA. But there was no mention of tax exemption on HRA in the Union Budget. For their expectations to get fulfilled, the salaried people waited for one more year.

In the budget, he proposed a tax exemption for second occupied homes on notional rent. According to the current Income Tax law, house owners who are having more than one self-occupied house were charged tax before. The salaries of employees of both public and private sector are categorized into various allowances such as house rent allowance, leave travel allowance, etc.

In the Union Budget 2020-21, Finance Minister Nirmala Sitharaman announced a new tax regime for tax payers in India. When compared to the old tax regime, the new tax regime underwent a lot of changes. The new tax regime will not have some of the tax exemptions or deductions as in the old tax regime. It also includes house rent allowance. If you choose new tax regime and file your taxes under new regime, you cannot avail the deduction for HRA.

What are the major benefits of HRA?

  • One of the major benefit of HRA is that it reduces the tax burden by serving as a medium in reducing the taxable income.
  • Actual HRA amount will be provided by your employer
  • 50% of basic salary for employees residing in metro city and 40% for employees residing in non-metro city
  • Actual rent paid will be 10% less of basic salary.


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