Your Guide to Make the Most of HRA for Tax Benefits

If you are a salaried employee and you stay in a rented house, then paying rent every month can be stressful. More so in urban India where rents are quite high. But the good thing is that the rent you pay gets you not only a roof over your head but income tax deductions as well. 

Our tax authorities are benevolent enough to give us tax breaks on house rent. This falls under House Rent Allowance, commonly known as HRA.

Salaried individuals can claim House Rent Allowance to lower their income tax outgo, partially or wholly, if they pay rent out of their salaries. The allowance is provided for expenses related to rental accommodation. This allowance is fully taxable if the salaried individual does not live in rented accommodation.

How is the HRA tax exemption calculated?

HRA is a component of your salary. This amount, which is subject to deductions, is a minimum of the following amounts:

• Actual HRA received
• 50% of basic salary (+ Dearness Allowance) for employees living in metro cities (40% if living in non-metros)
• Actual rent paid minus 10% of salary

Let us try to understand this component by considering an example.

Suppose there is a salaried employee ‘A’ who works for a company X in a metro city like New Delhi. ‘A’ stays in a rented flat for which he pays Rs 15,000 a month as rent. If he gets a basic salary of Rs 40,000, the calculations will be as follows.

• A’s Basic Salary (including DA) = Rs 40,000
• HRA received from company = Rs 15,000

Now his HRA might not be fully exempted from taxes. Instead, the HRA exemption that he would get would be the least of the following:

• Actual HRA received = (12 x Rs 15,000) i.e. Rs 1,80,000
• 50% of basic salary = (50% of 12 x Rs 40,000)i.e. Rs 2,40,000
• Actual rent paid less 10% annual salary = (12 x 15,000 - Rs 48,000)i.e. Rs 1,32,000

The minimum of the above three amounts is Rs 1,32,000. This is the HRA amount that will be available for tax exemption.

The remaining amount of Rs 48,000 will be taxed normally.

If you are self-employed or do not get HRA, you can still claim some HRA under Section 80GG of the Income Tax Act if you stay on rent. This would be the minimum of the following:

• Rs 5000 per month
• 25% of total income
• Actual rent minus 10% of the total income

HRA claims under Special Case:

HRA can be claimed under certain special situations as well. Let us consider them one by one.

1. If you are getting HRA as part of your salary and are staying in your parents’ self-owned house, you can still get an exemption on HRA - by paying rent to your parents. In this case, however, you need to have a rental agreement with your parents and you need to transfer money to them every month, providing proof of the same. Also, though this may result in a tax deduction for you, your parents will necessarily have to show this rental income in their tax returns.
2. It is possible to claim HRA exemption, plus deductions on home loan repayment. This is by Section 80C and 24B simultaneously. This means you can also claim the HRA exemption even if you are claiming tax benefits on a home loan that you have taken. However, you should not be living in the house that you bought with the home loan, otherwise, you can only claim tax benefits on home loan repayment and not on HRA. You might be required to provide a reason with proofs to your employer as well as the income tax department, whenever asked.
3. In the case of shared accommodation, you may live with your friends and split the rent. In this case, you need to have a rent agreement made which has the names of all the people paying the rent and the amount of rent paid mentioned against individual names. In the absence of any such agreement, a declaration from the landlord specifying the amount of rent (contribution to the total rent) you're paying, will also help.
4. In case of job relocation and changing of accommodations twice or thrice in one financial year, you need to get your rent receipts monthly instead of asking for them collectively at the end of the year. To claim the HRA, one must have the rental receipts and rental agreement. Also, get the PAN details of all the landlords of the houses where you have been staying.

This is how you can claim tax exemption on HRA. Remember to keep all your documents and rental proofs ready before filing your income tax returns. You also need to get your landlord’s PAN details if the total rent exceeds Rs 1 lakh annually.