Understanding how HRA
(House Rent Allowanc)
The end of another financial year is drawing close and is a couple of
months away. The words "income tax" start ringing a frantic bell
towards the end of every financial year, and many questions arise. Please do
note that it is best to be prepared in the beginning rather than the end of a
There are many tax components you need to be clear about and also figure
out how to plan your investments to gain maximum returns as well as maximum
tax benefits. One such tax component is the tax benefit you can claim from
your house rent allowance. This article helps you understand how this works!
HRA (house rent allowance) is provided to salaried people under Section 10
(13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax
Rules. Self employed professionals are eligible for tax deductions under
section 80GG of Income Tax Act, 1961.
When you are calculating HRA for tax exemption you take into consideration four
aspects which includes salary, HRA received, the actual rent paid and where
you reside, i.e. if it is a metro or non-metro. If these aspects remain
constant through the year, then tax exemption is calculated as a whole
annually, if this is subject to change, as in a rent hike or shift in
residence etc. then it is calculated on a monthly basis.
The place of residence is significant in HRA calculation as for a metro
the tax exemption for HRA is 50% of the basic salary while for non-metros it
is 40% of the basic salary.
On paying rent
It is not essential that you should pay rent only to a landlord to avail
your HRA benefits. You can pay rent to your parents to claim tax benefits.
However, they need to account for the same under `Income from house/property'
and will be entitled to pay tax for the same.
Remember you cannot try the same with your spouse, as it is not
permissible under income tax law, as you are expected to reside together for
all practical purposes.
You need to submit proof of rent paid through rent receipts, for which
only two need to be submitted, one for the beginning of the year and one
towards the end of the financial year. It should have a one rupee revenue
stamp affixed with the signature of the person who has received the
rent, along with other details such as the rented residence address, rent
paid, name of the person who rents it etc.
How is HRA calculated
To figure out how much HRA exemption you are eligible
for, consider these three values which includes a. The actual rent allowance
the employer provides you as part of your salary, b. the actual rent you pay for
your house from which 10% of your basic pay is deducted, c. 50% of your basic
salary when you reside in a metro or 40% if you reside in a non-metro.
The least value of these three values is allowed as tax exemption on your
HRA. You can discuss restructuring your pay structure with your employer in
order to avail the most of your HRA tax benefit.
Here is a sample illustration for your understanding:
Sheetal earns a basic salary of Rs. 40,000 per month and rents an
apartment in Delhi for Rs. 20,000 per month (hence eligible for a 50% of the
basic pay for HRA exemption). The actual HRA she receives is Rs. 25,000.
These values are considered to find out her HRA tax exemption:
a. Actual HRA received, i.e. Rs. 25,000,
b. 50% of the basic salary, i.e. Rs. 20,000, and
c. Excess of rent paid over 10% of salary, i.e. Rs. 20,000 — Ra 4,000 = Rs. 16,000
The value considered for her actual HRA exemption will be the least value
of the above figures. Hence, the net taxable HRA for Sheetal will be Rs.
25,000 — 16,000 (available HRA deduction) = Rs. 9,000.
Availing tax benefits on your home loan and HRA
As long as you are paying rent for an accommodation, you can claim tax benefits
on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income youreceive from the property you own.
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