HRA – House Rent Allowance – Exemption Rules & Tax Deductions
House Rent Allowance or HRA, is an allowance among many other allowances which are provided by employers to the employees for ensuring a certain standard of living for the employees. For making this a better and convenient one, the Income Tax Act has provided certain sections and allied provisions for providing the employees or professionals or self-employed individuals exemptions while paying tax to make the same desirable.
HRA is a sub-component of the salary package which is paid to the employee and this can either be fixed or derived on the basis of a special agreement formed between the employee and the employer. Mostly, this will be provided by the employer when the employee is living in a place or premise which is rented or is not owned by him.
There is also another allowance named Dearness Allowance or DA being paid to the employees by the employer. This is a component of the salary paid which is basically meant for being adjusted towards the cost of living incurred by the employees. It is generally paid to government employees, public sector employees, and also pensioners. It is computed as a part of basic salary such that it can be utilized for adjusting the inflation in the economy.
HRA of Self-Employed Individual
A self-employed individual shall be allowed to claim HRA exemptions or deductions as per section 80GG of Income Tax Act. It also allows the salaried employees to claim the deduction or HRA exemption even if they are not receiving HRA from their employer.
HRA Exemption from Tax in case of Salaried Individuals
The deduction which shall be made available to the individual with respect to the HRA received shall be least of the following as per section 10(13) of the Income Tax Act:
- HRA which is received actually from the employer or
- In the case of employees living in metro cities, 50% of basic salary plus DA (Dearness Allowance), or
- In case of employee living in any other city, 40% of basic salary plus DA, or
- Actual rent paid by the employee, minus 10% of basic salary plus DA.
Here the metro cities would include the following cities of India namely:
Cases where Rent Amount is exceeding INR 1 Lakh
When the rent paid by an employee is exceeding INR 1 Lakh per annum, then he should furnish the PAN of the owner of the property along with the rent payment receipts. It is only on the basis of this that the employer would be able to provide HRA deduction to employees in Form 16.
And in case of a property owner or the landlord who is not having a PAN, he shall give a declaration pertaining to the circular number 8/2013 issued on 10th of October 2013 without any failure. In case an employee is paying rent to an owner who is an NRI (Non-Resident Indian) then a TDS of 30% shall be deducted prior to the remittance of such payment to the owner.
Claiming of HRA and Deduction of Interest paid on Home Loan
The employee can claim a deduction of HRA as well as the payment of interest on the home loan and the principal repayment. Say, an individual is working in a city where he is living in a rented house. At the same time, his family is living in his home city, where he has also bought a home by taking a home loan. So here he is paying rent for the rented house while also paying back the interest plus principal amount on the loan taken. Thus, the individual can claim the following while filing his ITR or Income Tax Return pertaining to the relevant assessment year:
– HRA exemption for the payment of the rent
– Deduction of interest payment on home loan as per section 24 of the Income Tax Act
– Deduction of principal repayment on home loan as per section 80 C of the Income Tax Act.
The case where Employer is not Providing HRA
In case an individual is paying rent on a space occupied by him and is not receiving or is not paid HRA by his employer then such individual can claim deduction under section 80 GG of Income Tax Act, on the fulfillment of the following conditions:
- The individual is a self-employed or salaried person
- He has not received any HRA from the employer during the year for which deduction under section 80 GG is being claimed
- The individual or his spouse or minor child or HUF to which he belongs to or is a member does not own any residential property at the place where he is currently residing for the performance of his employment duties, or to carry on his profession or business.
And if the employee is owning any residential property on his own in another place or city apart from the above-specified one, then he shall not claim the same as a self-occupied property and it shall be deemed to be let-out for the purpose of claiming deduction under section 80 GG.
Claiming Deduction under section 80 GG
For claiming deduction of HRA under section 80 GG of the Income Tax Act the least of the following shall be considered:
- INR 5,000 per month, or
- 25% of the adjusted total income, or
- Actual rent paid by individuals is less than 10% of the adjusted total income.
The term adjusted total income here means:
Total Income Earned
(Less): Long-term Capital Gain
(Less): Short-term Capital Gain under section 111A
(Less): Income earned and declared under section 115A or 115D
(Less): Deductions from 80C to 80U.
This shall exclude deduction under section 80 GG.
Claiming of HRA by Individual living with Parents
There are many cases where individuals earning HRA from their employer are living with their parents despite of being paid the same. In such case, for the purpose of claiming a tax deduction, they can enter into a rental agreement with their parents, which is a simple one on a pre-agreed amount of rent, and transfer this to parent’s bank account on a monthly basis. This shall provide the parents with an extra income while allowing the individual to claim a tax deduction of the same while filing the ITR for the relevant financial year.
HRA not mentioned in Form 16
If the employer has not specified HRA as a separate component in Form 16, then the employee cannot claim the same as a deduction under section 10(13) of the Income Tax Act. So, in such a case the employee should rely on section 80 GG of the Income Tax Act such that they are able to claim the deduction with ease.
But the individuals cannot claim both the deductions together and shall stick to one on the basis of the availability of the HRA from the employer.
Documents to be Submitted for Claiming HRA
The employee shall provide or submit the following documents for the purpose of claiming deduction of HRA while filing the ITR:
– Rent payment receipts
– PAN details of the landlord if the rent paid is exceeding INR 1 Lakhs 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
Conditions to be Satisfied for Claiming HRA Deduction or Exemption
The following conditions should be satisfied for claiming exemption or deduction of HRA while filing the ITR of the assessee:
– The individual or assessee should actually pay the rent amount to the landlord or the owner of the rented property. And in case of periods during which such rent was not paid there won’t be any exemption or deduction provided or allowed.
– In case the individual changes the job or location of the job say from a metro city to a non-metro city, then the HRA computation shall be done on monthly basis. This would bring in changes in HRA exemptions for each period.
– If the individual is paying the rent to the father or relative on the basis of the rental agreement formed between the two it should be paid on monthly basis through bank transfers. This will make the claiming of HRA easy and simple.
Hence, we can now conclude that HRA earned by the employee as a part of their salary components can be claimed as a deduction by them while filing the ITR for the relevant assessment year. And for this, there are sections like 80 GG and 10(13) of the Income Tax Act made available. But it should also be noted that HRA exemptions under section 80 GG shall be made available only to individuals and HUF, and this can be computed on the basis of the following:
– Salary earned by the assessee
– HRA component which is included in the salary being paid
– The actual rent paid by the assessee
– The location of the residence was rented by the assessee.