What is House Rent Allowance(HRA )?: Explore How to Calculate It
Do you want to lighten the load of your rental costs while taking advantage of tax savings? Understanding what is HRA is a key part of managing your salary package. This guide looks at eligibility criteria, tax exemptions, calculation methods, and documentation to help you get HRA’s financial benefits. Whether you are employed or self-employed. Knowing more about it can assist in reducing taxable income as well as making housing costs easier to manage.
What is House Rent Allowance(HRA)?
House Rent Allowance (HRA) is a common part of salary packages in many countries, including India. This allowance given by employers enables employees to cover their rental costs for housing. An employer may provide HRA as part of an employee’s salary to support them with their rental payments for the home they live in.
The HRA allowance in salary can be beneficial, especially if the person is renting, helping them cover some or all of these costs. HRA acts as an incentive for the employee and can be used either towards paying rent or reducing total tax liability under Section 10 (13A) of the Income Tax Act, 1961.
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What is HRA Exemption?
The Income Tax Act of India allows individuals who live in rented accommodation and receive a House Rent Allowance (HRA) as part of their salary to claim a deduction on this amount, thereby reducing their taxable income. This provides them with an HRA Exemption that can be used to reduce taxes paid.
The final HRA exemption amount is determined by taking the lower of the actual HRA received from the employer; Rent paid for accommodation minus 10% of the basic salary; and 40-50% of the Basic salary. The difference between this calculated value and the actual HRA received will be added to an individual’s taxable income.
HRA for Self-Employed Individuals Vs Salaried Individuals
Self-employed individuals may use Section 80 GG of the Income Tax Act to claim deductions and tax exemptions on House Rent Allowance (HRA). This section allows self-employed individuals who do not receive a salary or receive income from a company, but only earn an independent livelihood in order to deduct rent payments for their residence as HRA exemption.
On the other hand, Individuals who are salaried can use Section 10 (13A), rule number 2A of the Income Tax Act in order to receive exemptions for House Rent Allowance (HRA). As this allowance is included with one’s salary, understanding all policies that accompany it becomes important when claiming taxes against such allowances. The maximum amount allowed is 50%of your basic salary if you live in bigger cities like Delhi NCR Mumbai Chennai Kolkata Hyderabad etc., while it’ll be 40% elsewhere according to these rules set by Government.
Eligibility Criteria To Claim Tax Deduction on HRA
If the following criteria are met, you may be able to claim HRA exemption for the time that you resided in a rented residence.
#1. Be a Salary Earner
If you are a self-employed person, then the tax benefits connected to HRA will not be available for your use. However, if you become a salaried employee these exemptions can be taken advantage of.
#2. CTC or Salary Package
Have an Employment Package or CTC that Includes a Housing Rental Allowance (HRA). Your CTC or salary package consists of basic wages, compensations, benefits, and other perks. It is important to ensure the allowance is part of your overall pay package in order to take advantage of this exemption.
#3. Reside in a Rented Apartment
In order to qualify for this exemption, you must be residing in rented accommodation and paying rent. If one owns their house they will not benefit from any tax exemptions as it is impossible to pay oneself rent.
#3. Living with Parents
If living with parents the occupant can still claim an income tax exemption. You can qualify for the exemption by making rent payments to your parents. However, they must report rental income earned from you on their tax return. It is recommended that these payments are made via bank transfer and a formal lease agreement should be drawn up between both parties.
#4. Submit Rent Receipts to Employer
You must submit your rent receipts to the employer in order to inform them of any rental payments made. If more than Rs 1,00,000 was paid as annual rent, then you need to provide your landlord’s Permanent Account Number (PAN) details along with it. Even if this information has not been declared previously or isn’t provided for exemptions from House Rent Allowance (HRA), they can still be claimed while filing taxes at the end of each financial year.
#5. Submit a Claim
Many times, it’s been seen that companies don’t include HRA exemption in Form 16 because of incomplete information. If your request for an HRA deduction has not yet been taken into account on Form 16, then you can submit the claim when filing your income tax return.
#6. Paying Rents to Spouse
Payments of rent made to a partner or spouse are not eligible for deduction under the House Rent Allowance (HRA).
#7. Landlord’s PAN
If the annual rent exceeds ₹1,00,000 then it will be necessary for the landlord to provide their PAN number in order to claim exemption. If they are unable to present a valid PAN card, an authorized statement must be submitted instead.
Factors That Determine HRA Amount
The HRA component in salary is determined by several elements, such as your wages, the allowance given to you by your employer for housing costs, how much rent money you spend every month, and whether or not a metro city or non-metro city is your residence.
For the purpose of calculating HRA, only Mumbai, Delhi, Chennai, and Kolkata are considered to be metro cities. All other places are classified as non-metro. The size of your potential deduction will depend upon various factors, including:
- Actual HRA received
- 50% of the sum of basic salary and Dearness Allowance (DA) for individuals residing in Delhi, Kolkata, Mumbai, or Chennai
- 40% of the total amount comprising basic salary plus DA for people living outside metropolitan areas
- The actual rent paid minus 10% of basic salary + DA
This HRA tax exemption can be worked out over a period of:
- One year or
- On a monthly basis
If all factors remain the same over a whole financial year, the annual calculations can be completed. However, if any changes have been made to one’s salary or rent amount during that period of time, then it has to be recalculated on a monthly basis.
How to Calculate HRA Exemption?
Let us consider an illustration of how HRA is calculated for Mr. Smith, a data scientist who earns a monthly salary of Rs. 25,000. He obtains a housing allowance amounting to Rs. 10,000 and pays rent worth Rs 12,000 every month on his apartment located in a big/metro city.
In order to determine the lowest amount of HRA exemption, we must take into account three amounts and select the smallest one.
| HRA Exemption Calculation | Amount (in Rs.) |
| Actual HRA received (Rs. 10,000 * 12) | 1,20,000 |
| 50% of salary (Basic salary + DA) for the metro city (50% of Rs. 3,00,000) | 1,50,000 |
| Excess of rent paid annually over 10% of annual salary (Basic salary + DA) | 90,000 |
The HRA exemption under section 10(13A) will be Rs. 90,000, being the least of all three amounts mentioned above. The taxable income would then be calculated as the difference between these two figures which is Rs 30,000 (Rs 1,20 000 – Rs 90 000).
What Documents are Needed to Receive a Tax Exemption for HRA?
The following are some of the usual documents that need to be provided in order to claim a tax exemption for an HRA:
- Rent Receipts: Rent receipts are essential documents that act as proof of rental payments and should include the landlord’s name, address, rental period, amount paid, and tenant’s name. They must be signed or stamped by the landlord for each payment made during the financial year.
- Rent Agreement or Lease Deed: Providing a copy of your rent agreement/lease deed will prove your HRA claim since it outlines all terms & conditions including rent amount & duration – serves as legal proof of tenancy
- PAN (Permanent Account Number) of Landlord: In some countries like India submission of PAN from landlords is mandatory before claiming tax exemption on HRA
- Declaration form Indicating Received HRA Amount: This declaration helps employers calculate eligible tax exemptions while deducting salary taxes
- Utility Bills(Electricity Bills, Water Electricity, etc.): These serve additional substantiation that one occupies rented accommodation
What to Do If We Do Not Receive HRA?
You may be eligible to claim deductions under Section 80GG of the Income Tax Act if you are living in a rented accommodation and paying rent, even though no House Rent Allowance (HRA) is provided by your employer. To qualify for these deductions, certain conditions must be met.
- In order to qualify for the deduction provided by Section 80GG of the Income Tax Act, you must be either self-employed (that is, you must have your own business) or be a salaried individual.
- In order for you to be eligible to claim the House Rent Allowance (HRA) deduction, you must not have received any HRA during that year.
- Further, it is important that neither you nor any of your family members (including minor children and Hindu Undivided Family of which you are a part) own residential property in the same location as where your duties of office or employment, or business/profession take place. This ensures only those who do not possess their own self-owned property can avail the benefits.
Conclusion
Now you know what is HRA or House Rent Allowance (HRA). It helps workers with their rental expenses and acts as a motivator for them to remain employed. In order to be able to claim HRA exemption, people have the responsibility of meeting certain eligibility criteria and submitting certain documents. Having knowledge of how this works will help taxpayers in saving money.
