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HRA – House Rent Allowance with Tax Exemption Rules

HRA – House Rent Allowance with Tax Exemption Rules

House rent allowance. More commonly known as HRA. If you had paid attention during the lesson on Income Tax in school, you might have had a better idea of what it is. But worry not, we’re here to help. In simple terms, house rent allowance is a component of salary that is paid to employees by an employer for their accommodation costs in the city, which also lets them get an HRA tax exemption on their income tax. House rent allowance is why you should pay more attention to your salary break-up when you get that offer letter from your company. And also why you should hold on to those house rent receipts.

Basis of HRA Calculation

House Rent Allowance is calculated based on the employee’s salary and the city they reside in. And a lot of it is up to the employer as well. But while this might make it sound complicated, the HRA calculation formula is pretty simple.

Basically, the tax exemption that one can claim on their House Rent Allowance is the lowest amount of these three:

  • The rent paid by the employee minus 10% of their basic salary
  • The total amount of House Rent Allowance offered by the employer
  • 50% of the salary if the employee works in a Metro city or 40% if he or she works elsewhere

Not clear yet? Let’s use an example.

Say there’s a guy called Kirat Vohli, who works for a company called ‘Choyal Rallengers’ in Bangalore. The company gives him a salary of ₹1,00,000, which is broken up like this.

Kirat’s Salary Component

Amount (₹)

Basic

Rs.50,000/-

HRA

Rs.20,000/-

Conveyance

Rs.8,000/-

Medical Allowance

Rs.12,000/-

Special Allowance

Rs.10,000/-

Total Salary

Rs.1,00,000/-

Now, though Kirat Vohli’s HRA allowance is 20 grand, he pays a rent of only 18k. So which one of these will be his HRA tax exemption?

  • Rent paid – 10% of basic salary = ₹18,000 – 10% of ₹50,000 = ₹13,000
  • The HRA allowance offered by the company = ₹20,000
  • 50% of basic salary (since he’s in a metro) = ₹25,000

Yup, the HRA tax exemption for Mr. Vohli will be ₹13,000. So, wasn’t that calculation as smooth as a cover drive by a cricketer whose name rhymes with Kirat Vohli?

What is HRA TAX Exemption?

HRA tax exemption is that amount that is deducted from an employee’s taxable income at the end of the year. It’s a cushion to the blow that is the skyrocketing rental rates in urban India. Now, you can do this only if you’re living in a rented apartment. People who have their own house cannot benefit from HRA calculation for income tax under Section 80GG. But then, half their salaries don’t go to their landlords as soon as it is credited to their bank accounts.

How is HRA TAX Calculated?

As we explained earlier, house rent allowance calculation is calculated on the basis of the HRA calculation formula, and the tax-exempt portion of the HRA is the minimum of the following elements:

  • Actual HRA received from the employer
  • 50% of the ‘salary’ if the accommodation is in the metro cities (Delhi, Mumbai, Chennai, Kolkata) and 40% for other cities
  • Excess rent paid annually over 10 per cent of the annual ‘salary’ 

Note here that ‘salary’ means basic salary, dearness allowance (DA) and commission received on the basis of percentage of turnover. So don’t get ahead of yourself and make the HRA calculation based on your entire CTC.

Rules to Claim HRA

Some of the most important HRA claim rules are as follows:

  • In order to avail of HRA benefits, it is not necessary that you pay rent only to a landlord. You can even pay rent to parents or family members and show house rent receipts to claim HRA exemption
  • Claiming HRA is not possible if you’re paying rent to your spouse. Sorry, married folks
  • All relevant receipts of rent paid need to be submitted as proof. So don’t ignore them like your boss ignores all the hard work you do
  • PAN card details of the landlord also need to be submitted so that relevant tax deductions can be made from the rent they received, but only if the rent paid exceeds 1 lakh pa
  • If you’re living in your own house and receive House Rent Allowance, do keep in mind that the amount is not exempt from income tax (maybe talk to HR about adjusting your salary components?)

FAQs on House Rent Allowance

Can I Claim both HRA and Home Loan Interest for TAX deduction?

Good news. You can claim income tax exemption on both HRA and home loans. If you are living in a rented place and paying a home loan on some other property, you can claim tax benefits for both of them. Even if they are located in the same city.

What percentage of TAX is Deducted on HRA?

So the least of these three amounts is your tax exemption on HRA

  1. The house rent allowance that is given by your employer
  2. The actual rent on your house rent receipt minus 10% of your basic salary
  3. 50% of your basic salary (for metro cities) and 40% (for people living in non-metro cities)

The remaining amount is taxed as per the tax slab you’re in.

Can I Claim HRA if I am Living in my own House?

Yes, you can but for that, you need to show proof of the required documents for HRA deduction. For example, if your parents are the owners and you pay house rent to them, you can claim the tax benefit if you can provide the house rent receipts.

How to Claim Benefits of Home Loan through HRA?

You can claim HRA exemption on home loan interest under section 24 and principal repayment under section 80C, when you pay rent in one city and own a house in another.

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