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All you need to know about House Rent Allowance in India

Team AckoNov 7, 2024

Are you a renter in India? Do you want to make the most of your House Rent Allowance (HRA)? Understanding how it works, its eligibility criteria, calculation methods, and tax implications is crucial for maximising your rental benefits. In this comprehensive guide, we will delve into the intricacies of House Rent Allowance in India. Whether you are a first-time renter or seeking to optimise your HRA claim, this article will provide you with all the necessary information. Let's dive in!

Contents

What is House Rent Allowance?
Eligibility criteria for HRA
Documents required for HRA Claim
Understanding the HRA taxation rule in India
HRA for self-employed individuals
HRA for salaried individuals
How is tax exemption from HRA calculated?
Illustration of HRA Calculation
What is an HRA Calculator?
How to use an HRA Calculator?
Why do you need a landlord’s Permanent Account Number?
How to claim HRA when living with parents?
Tips to maximise HRA benefits
House Rent Allowance
What Happens If You Don't Get an HRA?
Frequently Asked Questions (FAQs)

What is House Rent Allowance?

House Rent Allowance (HRA) refers to an element of the salary of an employee. It provides financial assistance for renting a residential accommodation. It is a valuable benefit offered by employers to help employees cope with the high cost of housing in urban areas. HRA is governed by the Income Tax Act and allows individuals to claim tax exemptions on the amount spent on rent.

Eligibility criteria for HRA

To be eligible for HRA, you must meet certain criteria.

Employment: You should be a salaried employee receiving HRA as a part of your salary package.
Rent payment: You must be paying rent for a residential property you currently occupy.
Rental agreement: It is essential to have a valid rental agreement between you and your landlord as proof of your tenancy.

Documents required for HRA Claim

To claim HRA exemption, you need to gather the following documents.

Rent receipts: Collect rent receipts from your landlord for the rent paid during the financial year.
Rental agreement: Ensure you have a valid and updated rental agreement with your landlord.
PAN of landlord: Obtain the PAN (Permanent Account Number) of your landlord if the annual rent exceeds a certain threshold.

Understanding the HRA taxation rule in India

The taxation rule regarding House Rent Allowance (HRA) in India specifies that HRA deduction is applicable only to salaried individuals and self-employed individuals who reside in rented accommodation. It is important to note that in the case that your salary has a section dedicated to HRA, the entire amount will become taxable if you do not pay rent for your accommodation.

HRA for self-employed individuals

By leveraging Section 80 GG of the Income Tax Act, self-employed individuals can claim deductions and tax exemptions towards their rental expenses.

HRA for salaried individuals

According to rule number 2A of Section 10 (13A) of the Income Tax Act, salaried individuals have the opportunity to avail exemptions for their House Rent Allowance (HRA). Since HRA forms a substantial portion of an individual's salary, it is crucial to adhere to the company's guidelines and policies when making HRA claims. By doing so, you can ensure compliance and maximise your HRA benefits.

How is tax exemption from HRA calculated?

When determining the tax exemption for House Rent Allowance (HRA), the following amounts are considered, and the lowest of these is eligible for deduction.

HRA received.
Fifty percent of the sum of basic salary and dearness allowance (DA) for those living in metros.
Forty percent of the sum of basic salary and DA for individuals living in non-metro cities.
Actual rent paid minus ten percent of the sum of basic salary and DA.

Illustration of HRA Calculation

Suppose you are a salaried individual residing in Mumbai and your annual salary includes a basic salary of Rs. 6,00,000 and a dearness allowance (DA) of Rs. 60,000. You pay a monthly rent of Rs. 25,000 for your accommodation.

Actual HRA received: Let's assume you receive an HRA of Rs. 30,000 per month, totalling Rs. 3,60,000 annually.

Percentage calculation: Since you live in a metro city like Mumbai, the HRA exemption is 50% of the sum of your basic salary and DA. 50% of [basic salary (Rs. 6,00,000) + DA (Rs. 60,000)] = Rs. 3,30,000

Actual rent paid: Your annual rent expense amounts to Rs. 3,00,000 (Rs. 25,000 x 12).

Adjustments: To calculate the final exemption, subtract 10% of the sum of your basic salary and DA from the actual rent paid. 10% of [basic salary (Rs. 6,00,000) + DA (Rs. 60,000)] = Rs. 66,000

Actual Rent Paid - Adjustments: Rs. 3,00,000 - Rs. 66,000 = Rs. 2,34,000

Based on the calculations above, the least of these amounts is Rs. 2,34,000. Therefore, Rs. 2,34,000 is the tax exemption you can claim for your HRA.

What is an HRA Calculator?

An HRA calculator is a handy tool designed to help individuals estimate their House Rent Allowance (HRA) tax exemption. It simplifies the process by providing a structured framework to calculate the eligible deduction based on various factors such as the actual HRA received, basic salary, dearness allowance (DA), and actual rent paid.

By inputting the relevant information into the HRA calculator, individuals can obtain an approximate figure of the tax exemption they can claim for their HRA. This eliminates the need for manual calculations and ensures accuracy in determining the benefits.

HRA calculators often take into account the different percentages applicable for metro and non-metro cities, as well as the adjustments for rent paid and salary components. Some advanced calculators may also consider other parameters such as the exemption limit as per the Income Tax Act.

Using an HRA calculator not only saves time and effort but also helps individuals make informed decisions about their tax planning. By exploring different scenarios and adjusting the inputs, individuals can optimise their benefits and minimise their tax liability effectively.

It's important to note that while an HRA calculator provides a reliable estimate, consulting with a tax professional or financial advisor is recommended for personalised advice and to ensure compliance with applicable tax regulations.

How to use an HRA Calculator?

Follow the steps below to effectively utilise an HRA calculator and estimate your House Rent Allowance tax exemption.

Step 1: Access an HRA calculator

Find a reliable HRA calculator that suits your needs. There are various online platforms and tax-related websites that provide them. Ensure that the calculator you choose is up-to-date and user-friendly.

Step 2: Gather the required information

Before using the calculator, gather the necessary information you'll need to input. This typically includes the amount of HRA you receive from your employer, your basic salary as mentioned in your salary slip, the amount of DA included in your salary and the total rent amount you pay for your accommodation.

Step 3: Enter the details

Enter the gathered information into the corresponding fields of the HRA calculator. Each calculator may have a slightly different layout, but you will typically find designated input fields for each parameter mentioned above.

Step 4: Specify city category

Indicate whether you reside in a metro city or a non-metro city. This is important as the HRA exemption percentage differs for these categories.

Step 5: Calculate the HRA tax exemption

Click on the "Calculate" or similar button to initiate the calculation process. The HRA calculator will apply the relevant formula and present you with the estimated tax exemption based on the entered details.

Step 6: Review and adjust if necessary

Take a moment to review the calculated tax exemption amount. If you need to make any adjustments to the input values, you can go back and modify the relevant fields accordingly. This allows you to explore different scenarios and fine-tune the estimation.

Step 7: Consult a tax professional (optional)

While an HRA calculator provides a reliable estimate, it's advisable to consult with a tax professional or financial advisor to validate the results and seek personalised advice based on your unique circumstances. They can help ensure accuracy and provide guidance on optimising your tax planning strategies.

Why do you need a landlord’s Permanent Account Number?

You need a landlord's PAN (Permanent Account Number) when you are a tenant and want to claim House Rent Allowance for tax purposes. As per the Income Tax Act, if the annual rent paid by the tenant exceeds Rs. 1,00,000, the landlord's PAN is required to be furnished while submitting HRA-related documents to the employer or tax authorities.

When dealing with landlords who do not have a PAN (Permanent Account Number), it is crucial for tenants to ensure compliance with tax regulations. As per circular No. 8/2013 dated 10 October 2013, landlords without a PAN must sign a self-declaration stating their non-possession of a PAN.

Moreover, tenants making rent payments to Non-Resident Indian (NRI) landlords must be aware of the requirement to deduct Tax Deducted at Source (TDS) at a rate of 30% before remitting the rental amount. This TDS deduction is necessary to fulfil tax obligations.

By adhering to these guidelines, tenants can maintain a transparent and legally compliant rental arrangement with their landlords, avoiding any potential issues related to PAN and TDS requirements.

How to claim HRA when living with parents?

To avail House Rent Allowance benefits while living with your parents, an effective approach is to establish a formal rental agreement with them. This agreement stipulates a monthly rent amount that you agree to pay to your parents. By claiming this rental expense as HRA during your income tax filing, you can deduct the corresponding amount from your taxable income.

However, it is important to note that your parents must disclose the rent received from you in their own income tax returns. This ensures transparency and adherence to tax regulations.

By adopting this approach and adhering to the necessary legal formalities, you can legitimately claim HRA benefits while living with your parents. Remember to maintain proper documentation and consult with a tax advisor to ensure compliance and optimise your tax planning.

Tips to maximise HRA benefits

To optimise your HRA benefits and save on taxes, consider the following strategies.

1. Rent receipts and rental agreement

Ensure you have valid rent receipts and a proper rental agreement in place. This documentation serves as evidence of your rent payment and tenancy, which is crucial while filing your tax returns.

2. HRA declaration

Make sure to declare your HRA to your employer at the beginning of the financial year. This allows them to calculate the appropriate HRA exemption and deduct the correct amount of tax from your salary.

3. Optimal salary structure

Consult with a tax expert or your employer's HR department to structure your salary in a way that maximises your HRA benefits. By adjusting the salary components, you can effectively increase your HRA and reduce your taxable income.

4. Rent splitting

If you live with family members or friends and share the rent, consider splitting the rent and obtaining separate rent receipts. This way, each individual can claim benefits individually, leading to additional tax savings.

5. House Rent Allowance calculator

Utilise online HRA calculators to determine the maximum HRA exemption you can claim based on your salary, rent paid, and city of residence. These calculators can provide accurate results and help you plan your finances better.

House Rent Allowance

Key Points:

Salaried people residing in rental housing are eligible to claim the HRA tax exemption.
HRA exemption is calculated based on multiple things like the actual rent paid, the base pay or salary of the individual, and the location of the rental housing.
Individuals who are self-employed may also qualify for the HRA exemption under Section 80GG of the Income Tax Act.
To request an exemption, you must provide valid rent receipts or other supporting documentation.
Many salaried individuals receive House Rent Allowance, included in their salary, as part of their compensation.

What Happens If You Don't Get an HRA?

The provisions of Section 80GG of the ITA may be used by self-employed persons who do not receive an HRA component to claim HRA exemption. If their company does not offer an HRA, salaried people who pay rent also have this choice.

Additionally, if an individual is paying rental expenses but does not have a salaried income, they may still reap the benefit by claiming rental expenses under Section 80GG of the Income Tax Act, 1961.

Claiming Deductions Under Section 80GG

You must be an individual taxpayer, whether self-employed or a salaried employee without HRA.
No residential accommodation must be owned by you, your spouse or even your minor children in the location of current residence or workplace.
The deduction amount under Section 80GG is calculated by deducting 10% of your total income from the minimum rent OR ₹5,000 per month OR 25% of your total income (lowest of the three)
The 80GG exemptions are calculated after deducting other allowable deductions under the Income Tax Act.
To claim 80GG deductions, you must submit Form 10BA along with your income tax returns (ITR), along with rent receipts, your rental agreement
You may not claim these deductions in case you are living with your parents.

HRA and deduction on Home Loan Interest

Subject to certain restrictions, you may deduct interest on home loans as well through HRA. When applying for a house loan:

You must be an employee
You should have received HRA as part of your salaried income
You should not own a place of residence in the city in which you work
You must be paying rent on a house in the city in which you work

To deduct HRA from your Home Loan Interest:

You need to have taken a home loan
You must be repaying the home loan
You must own a house

Naturally, the actual interest you have paid on the home loan is the amount of home loan interest you may claim against HRA. This may be claimed through the Income Tax Returns.

Important Rules to Remember for HRA Deductions

You cannot claim an HRA tax exemption if you are paying rent to your spouse.
You may claim HRA on income tax even if you have a home loan on your name.
It is mandatory to submit PAN details of your landlord if your pay exceeds ₹1 lakh per annum,
In case you are living with your parents, you may claim HRA by paying rent to them and getting a receipt.
For individuals who live in non-metropolitan regions, HRA is calculated at 40% of base pay; for those who live in metropolitan areas, it is calculated at 50%.
In case the landlord is an NRI, a 30% TDS (Tax Deducted at Source) will be deducted from rent.
Employees living in their own homes and receiving HRA are not exempt from paying Income Tax.

Illustrated Example

Mr. Kumar, employed in New Delhi, has taken up an accommodation on rent for which he pays ₹20,000 per month during the Financial Year (FY) 2021-22. He receives a basic salary of ₹30,000 monthly and DA of ₹3,000, which forms a part of the salary. He also gets an HRA of ₹1.5 lakh from his employer during the year.

To calculate the HRA component that would be exempt from income tax during FY 2021-22, we can follow similar steps as the previous example:

HRA received - ₹1,50,000
50% of basic salary and DA

50% (₹30,000 + ₹3,000) x 12 (months) = ₹2,16,000

3. Rent paid minus 10% of salary

₹20,000 x 12 - 10% (₹30,000 + ₹3,000) x 12 (months) = ₹2,04,000

In this case, the minimum value among these three calculations is the HRA of ₹1,50,000.

Therefore, the entire HRA received from the employer, which is ₹1,50,000, is exempt from income tax under Section 10(13A).

Highlights of the House Rent Allowance (HRA) in the Union Budget

On February 1, 2023, India's Finance Minister Nirmala Sitharaman delivered the Union Budget for the fiscal year 2023–2024. There were no updates made regarding the HRA exemption. Therefore, people may continue to calculate and apply for tax exemption on House Rent Allowance using the same procedure as in the prior financial year.

Important Dates: ITR Filing and HRA Tax Exemption Claims

The last date for filing Income Tax Returns for salaried employees wanting to claim HRA tax exemptions is July 31 of that fiscal year. For self-employed individuals, the last date remains July 31, when they do not require an Audit of their income, and September 30, an audit is needed to be done on their income for verification of the same.

However, this date may change due to specific reasons. Thus, to stay up-to-date on the most recent information on this, it is crucial to verify the Income Tax Department's most recent statements or seek the services of a tax expert such as a chartered accountant.

Frequently Asked Questions (FAQs)

Here are some FAQs related to House Rent Allowance in India.

What happens if HRA is not claimed in a particular financial year?

If HRA is not claimed in a particular financial year, the benefit cannot be carried forward to subsequent years. It is essential to claim it within the same financial year to avail of the tax deduction.

Can HRA be claimed for a house owned by the individual?

No, it cannot be claimed for a self-owned property. The tax benefit is intended for individuals who pay rent for their accommodation.

Is it necessary to provide rent receipts to claim HRA?

Yes, rent receipts are essential to support your claim. They serve as evidence of rent payment made to the landlord.

How is HRA calculated for employees living in metro cities?

For employees living in metro cities (Delhi, Kolkata, Mumbai, or Chennai), the calculation is based on 50% of the basic salary plus the dearness allowance (DA).

Can HRA be claimed if the rented accommodation is located in a different city from the workplace?

Yes, HRA can be claimed even if the rented accommodation is in a different city from the workplace. However, certain conditions need to be met, such as the necessity of maintaining a second residence due to employment reasons.

Are there any tax implications for landlords receiving HRA from their tenants?

Yes, landlords receiving HRA from their tenants are required to include the rental income in their tax returns and pay taxes accordingly.

Are maintenance charges eligible for HRA tax exemption?

No, maintenance charges paid for your apartment cannot be included for tax exemption. HRA deductions are specifically allowed for rent payments only. Expenses such as maintenance charges, electricity charges, utility payments, and similar costs are not considered eligible for tax exemption.

What to do when an employer denies HRA tax benefit?

If your employer refuses to grant the HRA tax benefit, you can still claim the benefit when filing your tax return and receive the exempted amount as a refund of any excess TDS (Tax Deducted at Source).

Can both working spouses claim HRA tax benefit individually?

Yes, both working spouses can claim the HRA tax benefit separately if both are paying rent to the same landlord and can provide separate rent receipts as proof. However, it is important to ensure that there is no duplication, as it could result in the income tax department deducting double the tax from the landlord's income from the property.

What is the concept of an HRA Certificate?

An HRA certificate refers to a document issued by a government employee to claim a house rent allowance when they are unable to avail of government accommodation as per the prescribed procedure. This certificate serves as evidence for the employee to request the HRA benefit.

How to provide HRA proof for Income Tax Return (ITR)?

To substantiate the claim for a house rent allowance deduction in your Income Tax Return (ITR), it is essential to submit supporting documents such as rent receipts and rental agreements to your employer. Additionally, if the rent payment exceeds Rs 1 lakh per annum, it is necessary to provide the landlord's PAN (Permanent Account Number). These proofs will be used by employers to grant the HRA exemption, which will be reflected in Form 16.

Is it possible to claim HRA without proof?

To claim a House Rent Allowance deduction, it is essential to provide rent receipts or a copy of the rental agreement as proof. These documents serve as evidence of your rental expenses and are mandatory for claiming the benefit.

Are there any consequences of not submitting proof for HRA exemption or missing HRA deduction in ITR?

If you fail to submit rent receipts or a copy of the rental agreement to your employer during the proof submission process, you still have the opportunity to claim the HRA deduction when filing your Income Tax Return (ITR).

In the event that you forget to claim the deduction while filing your return, you can rectify the situation by filing a revised return before the earliest of 31st December of the assessment year or completion of assessment.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet, and is subject to changes. Please consult an expert before making decisions.