What is HRA?

House Rent Allowance or HRA is a salary component paid to employees by an employer towards the accommodation cost of living in that city. Even though it is a part of your salary, unlike your basic pay, HRA isn’t entirely taxable, subject to conditions (a percentage of HRA is exempted under Section 10 (13A) of the IT Act, 1961).

Employers decide the HRA amount to be paid depending on criteria like the salary structure, salary amount, and city of residence. You can discuss this with your employer to ensure that you save maximum tax allowed as per the Income Tax Act.

HRA Deduction

The salary or pay for individuals can be defined as the sum of their basic salary, DA (dearness allowance), and any/all other commissions as applicable. HRA deduction calculation for employees residing in a metro will be 50% of the basic salary and is 40% for residence in a non-metro city. In case of salaried individuals without a DA component or commissions in their remuneration, the HRA allowance will be 40 or 50% of their basic pay.

The actual amount which you can claim for deductions under HRA will be the lowest of the three provisions:
  1. The amount an employee receives as the HRA from the employer.

  2. The actual rent paid minus 10% of the basic pay.

  3. 50% of the basic pay if the employee stays in metro and 40% for non-metro dwellers.

Additional Considerations

  • In spousal cases where both get separate receipts for rental payment from the landlord; HRA can be claimed by both separately, but care should be taken to avoid any duplication or discrepancies.

  • Self-employed individuals can also claim benefits for their rental payment under section 80 GG of the IT Act.

  • In cases where employers forget to add HRA in your Form 16, employees can avail refunds on excess tax deductions by claiming the same during ITR filing.

  • Employees without the HRA component as part of their remuneration cannot claim the benefits of HRA but can claim deduction under section 80GG of the Income Tax Act.

  • Homeowners with housing loans and HRA, as part of their pay, can claim deductions both under HRA and home loan benefits against interest payment and principal repayment.
The income tax department has made sufficient provisions to ensure that everyone can save taxes; it is up to you to ensure that you do the needful.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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