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HRA – House Rent Allowance – Exemption Rules, Tax Deductions

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HRA (House Rent Allowance)

House Rent Allowance, or HRA, is an allowance among many other allowances provided by employers to employees to ensure a certain standard of living. To make this a better and more convenient one, the Income Tax Act has provided certain sections and allied provisions for providing exemptions for employees or professionals or self-employed individuals while paying tax to make the same desirable.

HRA is a sub-component of the salary package paid to the employee, which can either be fixed or derived based on a special agreement between the employee and the employer. Mostly, this will be provided by the employer when the employee is living in a place or premise that is rented or not owned by him.

Another allowance, named Dearness Allowance or DA, is also being paid to the employees by the employer. This is a component of the salary paid which is meant to be adjusted towards the cost of living the employees incur. It is generally paid to the government, the public sector, and pensioners. It is computed as a part of the 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 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 the least of the following as per section 10(13) of the Income Tax Act:

  1. HRA, which is received actually from the employer or
  2. In the case of employees living in metro cities, 50% of the basic salary plus DA (Dearness Allowance), or
  3. In the case of employees living in any other city, 40% of the basic salary plus DA, or
  4. 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:

  • Delhi
  • Mumbai
  • Calcutta
  • Chennai

Cases where Rent Amount exceeds INR 1 Lakh

When the rent paid by an employee exceeds INR 1 Lakh per annum, he should furnish the PAN of the property owner along with the rent payment receipts. It is only based on this that the employer would be able to provide an HRA deduction to employees in Form 16.

And if a property owner or the landlord does not have a PAN, he shall give a declaration about circular number 8/2013 issued on the 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 before 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 and interest payment 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 the principal amount on the loan. Thus, the individual can claim the following while filing his ITR or Income Tax Return about 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 an individual can claim a deduction under section 80 GG of the Income Tax Act, on the fulfilment of the following conditions:

  1. The individual is a self-employed or salaried person
  2. He has not received any HRA from the employer during the year for which deduction under section 80 GG is being claimed
  3. The individual or his spouse or minor child or HUF to which he belongs or is a member does not own any residential property where he is currently residing for the performance of his employment duties or to carry on his profession or business.

And if the employee owns any residential property 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 to claim deduction under section 80 GG.

Claiming Deduction under section 80 GG

For claiming a deduction of HRA under section 80 GG of the Income Tax Act, the least of the following shall be considered:

  1. INR 5,000 per month, or
  2. 25% of the adjusted total income, or
  3. 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 an Individual living with Parents

There are many cases where individuals earning HRA from their employer live with their parents despite being paid the same. In such cases, to claim 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 their parent’s bank account every month. 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 is 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 to easily claim the deduction. But the individuals cannot claim both deductions together and shall stick to one based on the availability of the HRA from the employer.

Documents to be Submitted for Claiming HRA

The employee shall provide or submit the following documents to claim a deduction of HRA while filing the ITR:

  • Rent payment receipts
  • PAN details of the landlord if the rent paid exceeds 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 pay the rent amount to the landlord or the owner of the rented property. And when such rent is 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 a 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 based on the rental agreement between the two, it should be paid monthly 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, sections like 80 GG and 10(13) of the Income Tax Act are 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 based on 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 assessee rented the location of the residence.

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HRA FAQs

1. What is House Rent Allowance (HRA)?

House Rent Allowance (HRA) is an allowance employers provide to salaried employees to cover their rental expenses. It is a part of the salary structure and is eligible for tax benefits.

2. Who is eligible for HRA?

Salaried employees who live in rented accommodations and receive HRA as a part of their salary can claim HRA benefits.

3. How is HRA calculated?

HRA calculation depends on three factors: the actual rent paid; the HRA received from the employer, and the city of residence. The lowest of these three values is eligible for tax exemption.

4. Is it necessary to submit rent receipts to claim HRA?

Yes. It is generally required to submit rent receipts as proof of rent paid to claim HRA. However, submitting rent receipts may not be mandatory if the rent paid is below a specific limit (Rs. 3000 per month).

5. Can I claim HRA if I live with my parents or in my own house?

If you live with your parents, you cannot claim HRA. Similarly, if you live in your own house, you cannot claim HRA benefits as it is meant for individuals living in rented accommodations.

6. Are there any tax exemptions for HRA?

Yes, HRA is eligible for tax exemption under Section 10(13A) of the Income Tax Act. The exemption amount is determined based on the HRA received and other factors mentioned earlier.

7. Can I claim HRA if I don’t have a rental agreement?

It is ideal to have a rental agreement to claim HRA, as it serves as proof of your rental arrangement. However, in the absence of a rental agreement, alternative documents like rent receipts, bank statements showing rent transactions, or a letter from the landlord may be considered.

8. Can I claim HRA if I live in a different city than my workplace?

Yes, you can claim HRA if you live in a different city than your workplace. The HRA calculation considers the city of residence for determining the eligible HRA amount.

9. Can I claim HRA for a house owned by my spouse or family member?

No, you cannot claim HRA if the house is owned by your spouse or family member. HRA benefits are applicable only for rented accommodations from a third-party landlord.

10. Can I claim both HRA and a home loan deduction?

Yes, you can claim both HRA and a home loan deduction. However, to claim the home loan deduction, you must have a home loan and own a house, while HRA benefits can be claimed for rented accommodations.

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