House Rent Allowance (HRA): Meaning, Deduction & Exemption

The House Rent Allowance (HRA) is a key element in salary structures. It is offered to employees to help them lessen the burden of their rental expenses, and as the allowance comes with tax benefits, it also helps them with a bigger take-home pay.Below, we explain everything you must know about HRA: from its meaning and calculation to its rules and exemption limits.

HRA in salary is the component in your pay packet to compensate for the rent you pay for your accommodation.

Self-employed individuals are also eligible for deductions and tax exemptions for HRA. They can make use of Section 80GG to claim these benefits.

Salaried individuals can avail exemptions for HRA under Section 10 (13A), rule number 2A of the Income Tax Act. Since HRA forms a substantial portion of an individual's salary, adhering to the company's policies concerning HRA claims is crucial.

Here are a few HRA rules that you must know :

• To qualify for HRA tax exemption, rent receipts must be provided as evidence. Rent receipts are a must because, without them, you won’t get any exemption
• If employers unintentionally omit HRA from your Form 16, you can still claim refunds for excessive tax deductions by including it during the filing of your Income Tax Return (ITR)
• You can claim HRA exemption by paying rent to family members such as parents (but not spouse) and providing the required documentation
• Individuals who reside in their own homes are not eligible for tax deduction under HRA
• Claiming HRA exemption by paying rent to your spouse is not permitted
• If the annual rent payment is greater than Rs. 1 lakh, the landlord must give the employees their PAN card information. This way, employees could claim HRA tax exemption
• If the annual rent is less than Rs 1 lakh, then the employee doesn’t need to show the PAN card details of the landlord
• Individuals, spouses, children, or members of Hindu Independent Families (HUF) must not have any assets to qualify for tax relief under HRA. In addition, if the person has a house in another place and earns rental income, no deduction is made

If you don't receive House Rent Allowance from your employer, you won't be able to claim any associated tax benefits. However, you can still claim tax benefits on rent paid through other provisions available under the income tax laws.

Deduction under Section 80GG:

If you are a salaried or self-employed individual who does not receive HRA, you can claim a deduction under Section 80GG for the rent paid for your accommodation. The tax exemptions will be determined based on the following criteria:

• Rs. 5,000 per month
• 25% of the adjusted total income
• The actual rent should be less than 10% of the adjusted total income

The calculation for adjusted total income is as follows:
Adjusted Total Income = Total income - long-term capital gain - short-term capital gain under Section 111A - income under Section 115A or 115D - deductions 80C to 80U (excluding deduction under Section 80GG)Also Read: Section 80GGC Of The IT Act: 3 Things You Should Know

Business expense:

If you are self-employed or a business owner, you can claim rent paid for premises used for business purposes as a business expense. This can be utilised to reduce your taxable business income.

The HRA Exemption Limit is the maximum amount an employee can claim for tax exemption under Section 10 (13A) of the Income Tax Act 1961 . The HRA exemption limits are:

• Actual HRA received from your employer
• Rent paid minus 10% of your basic salary and DA
• 50% of the basic salary and DA if you live in a major metro city or 40% of the basic salary and DA if you live in a non-metropolitan city.

The tax exemption is based on the lowest amount among the above three points. You can communicate this to your employer to maximise your benefits and suitably arrange your salary.Let’s say you live in Delhi and receive a basic salary of Rs. 60,000 per month and pay rent of Rs. 20,000 monthly. You also receive an HRA of Rs. 20,000 from your employer.Here’s how your HRA exemption is calculated:

Thus, your HRA exemption would be Rs 14,000.

House Rent Allowance is an essential component of employers' salary packages in India. Here are some essential facts to keep in mind about HRA :

• HRA is an allowance that the employer provides to the employee to cover rental expenses. You must request HRA as part of your salary package to receive it
• To claim HRA and home loan exemptions, living in a rented space and paying home loan EMIs for another property is allowed. However, high amounts without valid reasons are scrutinized, and claims need proper documentation to avoid rejection
• Only a portion may be exempted. Specific limitations and criteria laid out in tax laws apply to eligible exemptions. The maximum amount of HRA that can be claimed is the actual rent paid minus 10% of the basic salary plus Dearness Allowance (DA)
• Proper documentation is necessary to ensure that the claim is not rejected and to claim HRA exemption, you must provide rent receipts as evidence of rental expenses. If the supporting documentation is insufficient, the tax authorities may reject the claim
• If you pay rent for your primary residence and have a home loan for a different property, you are eligible to apply for an exemption from both HRA and a home loan simultaneously
• You can pay a family member's rent and qualify for HRA benefits if they have the required documentation. This includes paying rent to a parent but not a spouse
• Claim the exemption while filing your tax returns. Ensuring that the HRA exemption claimed is accurate and supported by proper documentation is essential

Note that the actual HRA amount will be the minimum of the above calculation, or the actual rent paid minus 10% of the basic salary. Proper documentation, such as rent receipts, is crucial to ensure that the HRA claim is not rejected.

Applying for House Rent Allowance in India involves following a few essential steps to ensure you can avail of the benefits associated with HRA tax exemptions.

Collect receipts:

To support your HRA tax exemption claim, it is important to get receipts from your landlord. These should include information about the amount payable, the name of the landlord, the location of the rented house and the length of the lease.

Submit lease agreement:

If you have maintenance charges, please send a second copy. Your rental terms, rental period and other information should be specified in the rental agreement.

HRA processing:

Submit required documents from your employer such as rent receipt and lease agreement and HRA return form. Make sure to provide accurate information to avoid any discrepancies.

File income tax returns:

When filing your income tax returns , ensure you claim the HRA exemption accurately. Calculate the eligible amount for exemption based on the HRA calculation criteria mentioned earlier and include it in the relevant section of your tax return form.

If you pay your parents rent, you can still claim an HRA exemption. However, you must be careful while claiming the exemption, as the income tax department may scrutinise your claim. Here are some tips to help you claim the HRA exemption for parental rent payments without the department getting involved:

• Rental agreement: Even if the landlords are your parents' own, sign a contract that specifies the rent paid, duration, and other relevant details
• Bank transfers: Pay through a bank transfer or a cheque to help you maintain a record
• Rent receipts: Your parents should provide you with rent receipts, which you should keep safely since they help you claim HRA exemption

Salaried and self-employed people can take advantage of HRA for tax savings. Also, plan your tax exemptions and deductions from HRAs and other taxable investments before the assessment period.You should consult a tax professional or refer to the guidelines issued by the income tax department to be aware of any changes regarding the Indian HRA.