House Rent Allowance (HRA) is a important component of our salary for, this offer us financial assistance for those living in rented accommodations. It not only helps in managing living costs but also offers an opportunity for tax exemption,. Here we will learn how its exemption works under Indian income tax law, and the critical factors to keep in mind when calculating HRA exemptions.
What is House Rent Allowance (HRA)
House Rent Allowance is an amount paid by employers to employees with the CTC to cover the cost of renting a home. It forms part of an employee’s salary. HRA is a part of taxable income, a portion of but we claimed as tax-exempt under Section 10(13A) of the Income Tax Act.
For salaried employees, HRA offers a dual benefit: it helps them afford rental housing and offers tax relief, which can be a significant saving, especially for those in high-cost urban areas.
Conditions for Claiming HRA Exemption
Below are conditions for claiming HRA
1. Receiving HRA as a Salary Component: Only individuals who receive HRA as part of their salary are eligible for exemption. If HRA is not included in your salary package, you cannot claim this benefit.
2. Payment of Rent: You must live in a rented house and pay rent. If you live in your own house or do not pay rent, you cannot claim the HRA exemption.
3. Rent Exceeds 10% of Salary: The amount of rent paid should exceed 10% of your basic salary. Only then will you be eligible for any HRA exemption
How we calculate HRA Exemption
The exempt portion of HRA is calculated based on the least of the following three factors
1. Actual HRA Received: This is the HRA amount paid by your employer as part of your salary.
2. 50% (or 40%) of Salary: If you reside in a metro city (Mumbai, Kolkata, Delhi, or Chennai), 50% of your salary is considered. For non-metro residents, this is reduced to 40%.
3. Rent Paid Minus 10% of Salary: The rent you pay minus 10% of your basic salary forms the third component of this calculation.
The amount of HRA exemption is the least of these three values.salary for HRA exemption purposes includes basic salary plus dearness allowance (DA) and excludes other components like bonuses or special allowances
Example of HRA Exemption Calculation
Basic Salary: ₹40,000 per month
HRA Received: ₹15,000 per month
Rent Paid: ₹18,000 per month
City of Residence: Non-metro city
We now calculate the exemption:
1. Actual HRA received: ₹15,000
2. 40% of Basic Salary: ₹40,000 × 40% = ₹16,000
3. Rent Paid Minus 10% of Basic Salary: ₹18,000 – ₹4,000 (10% of ₹40,000) = ₹14,000
In this case, the least of these three values is ₹14,000. Hence, ₹14,000 will be the exempt portion of HRA, and the remaining ₹1,000 (₹15,000 – ₹14,000) will be taxable.
Important Points to Note
1. PAN Requirement for Rent Exceeding ₹1 Lakh: If the annual rent paid exceeds ₹1 lakh, the tenant must provide the landlord’s PAN card details to claim HRA exemption. Failure to furnish the PAN may result in denial of the exemption.
2. HRA and Home Loan: Interestingly, you can claim both HRA and a home loan deduction if you meet the necessary conditions. For example, if you own a house in one city but live in a rented accommodation in another city due to work, you can claim HRA as well as tax benefits under Sections 24(b) and 80C for your home loan.
3. Paying Rent to Family Members: You can pay rent to your parents or siblings and claim HRA exemption, provided they own the property and the payment is genuine. However, you cannot pay rent to your spouse and claim an HRA exemption.
4. Filing Rent Receipts: It’s important to keep a record of rent receipts as proof for claiming HRA exemption. Employers may ask for these receipts, especially if the rent paid exceeds a specific threshold (typically ₹1 lakh per annum).
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