What Is HRA, HRA Exemption, And Calculation?

HRA, House Rent Allowance, is a component included in the salary of many employed individuals. However, could renting a house make you eligible for a tax exemption on your HRA?

Please note that you can only claim HRA if you have chosen the old tax regime. This deduction is not available under the new tax regime. Now, let us dive into more details! 

What Is HRA (House Rent Allowance)?

A common element in the employee's pay slip, HRA, is an amount employers provide to employees to cover their rent expenses. It is a part of your taxable income. However, you can save taxes through HRA exemption. 

What Is HRA Exemption And Its Eligibility Criteria? 

Here, we will cover HRA for salaried individuals. HRA exemption is an amount deducted from your taxable income under Section 10 (13A), rule 2A of the Income Tax Act if you meet specific eligibility criteria¹: 

• You are a salaried individual.
• You have the HRA component in your salary.
• You are paying rent for a house you live in. 
• You and your landlord have a valid rental agreement in your name.

How Much Amount Can You Claim For HRA Exemption? 

You can claim HRA exemption that is the minimum of: 

1. Actual HRA received by your employer or
2. Annual rent paid minus 10% of your salary or
3. 50% of your salary if you live in a metro city, i.e. Delhi, Kolkata, Mumbai, and Chennai, while 40% is for non-metro cities.

The remaining amount of HRA will be a part of your taxable income. It is important to note that this calculation applies to HRA for salaried individuals under 

Note: The "salary" mentioned above includes basic salary, dearness allowance and sales commissions. No other allowances are considered for the calculation of HRA exemption. 

Example Of HRA Exemption Calculation 

Mr X lives in Delhi and pays INR 20,000 per month as rent. He works as a salaried employee in Delhi, getting INR 40,000 as a basic salary and INR 15,000 as an HRA monthly. 

Let us calculate the HRA exemption amount for Mr X using this information: 

1. Actual HRA received of INR 15,000*12 = INR 1,80,000
2. Actual rent paid annually minus 10% of basic salary= INR 2,40,000- 48,000 = INR 1,92,000
3. 50% of basic salary (INR 40,000*12) since Mr X is living in a metro city = INR 2,40,000

The minimum amount is for "Actual HRA received" of INR 1,80,000, which you can deduct from your annual taxable income. In this case, there will be no remaining amount for tax exemption from HRA (HRA received). 

You can also use a calculator by the Income Tax Department for an easy and quick estimate of the HRA exemption amount.

HRA Benefits Other Than Salaried Person

There might be a situation where your employer does not provide HRA, or you are a self-employed tax-paying individual. 

In such a case, taxpayers can still claim a deduction through HRA for self employed category under Section 80GG (Income Tax Act) provisions if they pay house rent². However, a taxpayer needs to fulfil certain conditions: 

• You are salaried or self-employed.
• You have not claimed the HRA benefit at any time during the year for which you claim 80 GG. It means you are ineligible even if you received HRA for one month in the entire year. 
• You and your spouse do not own a residential property in your workplace for employment. 

To claim a deduction under this provision, an individual must file a declaration in Form 10BA. It includes rent details like the amount, landlord's name, etc. 

Section 80GG- Amount Deduction Limit 

The income tax department will consider the minimum of the following amounts for deduction: 

1. INR 5,000 per month, i.e. INR 60,000 per year 
2. 25% of total adjusted income 
3. Actual rent minus 10% of adjusted income 

Things To Keep In Mind While Making HRA Tax Deductions

Here are a few points to consider for a deduction: 

• You cannot claim deductions if you pay rent to your spouse.
• Submitting your landlord's PAN details is mandatory if you pay more than INR 1 lakh as annual rent. 
• You can claim HRA even if you live with your parents by paying them rent.
• It would help if you deducted TDS of 30% when paying rent in case your landlord is NRI. 

Conclusion 

Understanding HRA is about unlocking a significant tax benefit to ease your financial burden. Optimising your HRA can help you with your financial planning. 

Explore Grip Invest and stay updated on all relevant financial planning opportunities. 

Frequently Asked Questions On HRA Exemption

1. What is adjusted income in Section 80GG exemption calculation?Adjusted gross income, also known as (AGI), is defined as total income minus deductions or "adjustments" to your eligible income.

Adjusted income = Total income - long-term capital gain - short-term capital gain subject to tax at 10% - deductions under 80C to 80U* - income under section 115A or 115D.

*You should not include 80GG deduction in 80C to 80U. This adjusted income is before making a deduction under 80 GG. 

2. Can you claim HRA if you are staying with your parents? 

Yes, you can claim HRA by paying rent to your parents if: 

• Your parents are the house's owner, and you are not the joint owner.
• You have proof of rent payments in the form of receipts. You should deposit the rent in your parent's bank account, preferably via cheque or online bank transfer. 
• You have a valid rent agreement with your parents.

It is also essential to know that your parent's total income will include your rental income. It will be taxable under the category 'income from house property'. 

In cases where a parent's income falls under a lower tax bracket than you, it can help save taxes for a family as a whole. 

References:

1. Central Board of Direct Taxes <https://tinyurl.com/5bh7kjcz>
2. Central Board of Direct Taxes <https://tinyurl.com/3kynjd7m>

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