Several benefits, including the house rent allowance, or HRA, are offered by companies to their staff members to help them maintain a particular quality of living. The Income Tax Act provides specific parts and related measures for exempting employees, professionals, or self-employed individuals while paying tax to make the same desirable. The HRA is a portion of the employee’s wage package that can be fixed or calculated based on a unique agreement between the employee and the employer. When an employee lives in a home or property that is rented or that he or she does not own, the employer usually provides this.

HRA exemption under the Income Tax Act

A portion of an employee’s HRA is exempt from taxation under the Income Tax Act of 1961, while the remaining portion is taxable. A set of requirements must be satisfied to determine the amount of HRA that may be subtracted from the total compensation. The HRA income tax calculation includes determining the deductions. Since HRA is designed to cover the expense of your rental accommodation, you cannot use it if you live in a property you own.

Conditions for Claiming HRA

Eligibility criteria for claiming HRA

HRA perks are available to salaried employees who reside in rental housing and earn HRA as a perk of their pay.

Calculation of HRA Exemption

Your salary is a key factor in determining HRA. The tax exemption is a component of the HRA according to income tax regulations. The HRA is determined based on the following variables:

• Rent paid: The amount you pay each month to live in the house. You cannot make an HRA claim if you stay in a hotel. You will need lease papers, bank statements, and rent receipts to demonstrate that you are paying rent.
• Wage: The various wage elements, such as your basic income, Dearness Allowance (DA), and special allowances, all play a part in establishing your HRA.
• Residence: Your HRA may be impacted by the city in which you reside. The HRA should not be more than 50% of your basic pay if you live in a metropolis and 40% of your salary in a non-metropolis.
• HRA from the employer: An essential consideration in determining HRA deductions is the real HRA that you get from your employer.

HRA Claim Limit

The lowest of the three sums above is exempt from tax: Real HRA was given. Less than 10% of the rent was paid. Depending on where the domicile is, 50% (or 40%) of the pay is the minimum HRA claim limit.

Scenarios where HRA claim can be less than 1 lakh

A prevalent myth is that employees can only request HRA if their annual salary exceeds one lakh rupees. However, if a person meets the requirements for claiming HRA and their rent payment is less than the sum determined using the three previously mentioned criteria, they may claim HRA for less than one lakh.

If an individual’s HRA is less than Rs. 1 lakh, the difference between the actual HRA received and the sum determined using the three criteria above is used to determine the taxable amount of HRA. The difference amount is included in the employee’s taxable income, and the tax obligation is determined using the tax slab rate for the specific person.

The tax benefit received by the employee will be smaller than that of an employee who is qualified to claim the entire HRA amount if the HRA amount claimed is less than Rs. 1 lakh. In contrast to someone qualified to claim the entire HRA amount, the employee will ultimately pay more tax.

It is crucial to remember that a person can still use the other deductions and exemptions allowed by the Income Tax Act to lower their taxable income and decrease their tax obligation. Tax-saving strategies include investing in tax-advantaged mutual funds, acquiring health insurance, and contributing to a retirement savings plan.

Documents required for HRA claim

To deduct HRA when submitting an ITR, the employee must supply or submit the following documents:

• Rent payment receipts
• PAN details of the landlord if the rent paid exceeds INR 1 Lakh during the year
• Name of the property owner
• Name of the resident or tenant, i.e., employee
• Address proof of the rented premise
• Tenure of rental stay
• Sign of the property owner with revenue stamp
• Copy of rent agreement

Process of claiming HRA

When the assessee files their ITR, they must meet the following requirements to claim an exemption from or deduction for HRA:

• The tenant or assessee is responsible for paying the rent to the occupant or owner of the rented space. There won’t be any exemptions or deductions offered or permitted if such rent is not paid.
• The HRA calculation must be done every month if the employee changes jobs or work locations, such as moving from a metropolis to a smaller town. HRA exemptions for each period would alter as a result of this.
• If the rent is being paid to the father or another relative under the terms of their rental agreement, it should be paid monthly via bank transfers. This will make the HRA claim process quick and straightforward.

Filing an HRA claim with the employer

PAN card: To submit an HRA claim, your employer might need the information from your PAN card. To claim HRA, you must provide your employer with Form 12BB. Form 12BB is a declaration form that lists the amount of rent paid, the landlord’s name and address, and, if available, the landlord’s PAN.

HRA claim for self-employed individuals

Self-employed people may exclude or deduct HRA expenses under Section 80G of the Income Tax Act. Additionally, it enables salaried employees to seek the HRA deduction or exemption even if their company does not currently provide it.

HRA claim for individuals living with parents

The employee or person may pay the property’s owner’s rent while deducting HRA if the employee’s parents are the owners. The employee cannot deduct the HRA if they share a rental home with their parents and are responsible for the rent.

HRA claim for individuals with no rental agreement

An HRA claim cannot be made unless the lease is available. However, few businesses allow HRA claims without rental agreements.

However, you can get HRA without rent invoices if your monthly HRA does not exceed Rs. 3,000. However, you cannot claim your HRA without rent receipts if it exceeds Rs. 3,000. An HRA claim cannot be made unless the lease is available.

Tips and strategies for optimizing HRA claim

Maximize HRA claim within the permissible limits

If a person’s rent payment is less than the amount established using the three criteria, they may not be able to receive the entire benefit, but there are still ways to maximize the HRA benefits.

HRA advantages can be increased by persuading the landlord to accept a higher rent. As a result of having to pay more for rent, the employee would be able to get more HRA.

To improve HRA benefits, a larger pay component may also be negotiated. By increasing the basic salary component, the HRA amount could be increased using 50% or 40% of the basic income requirement.

Individuals also have access to many other tax-saving options besides HRA. Health insurance policies, fixed deposits, retirement savings plans, and house loan interest deductions are just a few options that can help reduce taxes. Other options include buying a health insurance policy.

Considering alternate tax-saving options

As a result, we can say that an employee who receives HRA as a part of their compensation components may be able to deduct it from their income when filing an ITR for the appropriate assessment year. To help with this, the Income Tax Act has sections like 80GG and 10(13).

Conclusion

The HRA tax exemption is one of the best legal ways for salaried employees to reduce their tax burden; therefore, they should not pass up the chance to use it. Ensure that you retain all legitimate supporting documentation. As it is challenging to prove rental payments are made in cash, choose a money transfer through a bank account to be safe. According to Section 10(13A) of the Income Tax Act, the exemption amount is calculated.

By contacting Kanakkupillai.com, you can also regain control over your finances. You may learn how much you can save on taxes and make the most of your HRA benefits using Kanakkupillai’s online HRA calculator. Plan for a more prosperous financial future by calculating your house rent allowance immediately.