Understand House Rent Allowance

Did you know that paying house rent can help you save on taxes? Tax exemptions on house rent allowance, yes you have got us right! This means that renting a house not only provides you with shelter but allows you to save on taxes as well. If you are not aware of this yet, this blog is for you. In the section below, we will talk about House Rent Allowance, tax deductions on it, how it is calculated, and a lot more. 

What is House Rent Allowance (HRA)?

House Rent Allowance or what is commonly abbreviated as HRA is a special allowance that the employer provides to its employees for financial assistance on housing. Be it public sector or private sector, most employers have this HRA component in the salary of their employees. In addition to offering financial assistance, HRA can also be used for tax-saving purposes. According to section 10(13A) of the Income Tax Act of 1961, salaried individuals can save on taxes by claiming House Rent Allowance while filing Income Tax Returns.

Who Can Get Tax Deduction on HRA?

To be eligible for getting tax deductions on HRA, you need to fulfill the following criteria:

• Salaried Individual: You need to be a salaried individual to get tax benefits on house rent allowance
• HRA in Salary Break-up: You must have an HRA component in your CTC, otherwise you won’t be able to get tax benefits
• Reside in Rented Property: You must be living in rented accommodation. But, in case you are living in your parent’s house and are paying rent, then that too can be claimed as tax deductions. However, the only condition is that your parents need to submit this rental income while they are filing ITR.
• House Ownership: You or your spouse must not be the owner of a residential property at the place where you are residing

Please note, that if you are a self-employed person and are paying rent towards your accommodation, you can claim tax deduction under section 80GG of the Income Tax Act of 1961.

Documents Required for HRA Claims

There are a number of documents that you need to provide while claiming tax benefits on House Rent Allowance such as those listed below:

• Rent Receipts: This is one of the most important documents that serves as legal proof of your house rent. The receipt should indicate the name of the landlord, address, rent amount, and tenant’s name.

• Rent Agreement: The rent agreement paper is an important document indicating the tenure of rent, rent amount, and any changes made in the rent clause.

• Utility Bills: Utility bills like electricity bills, gas bills, and water bills can also be sometimes required while HRA claims.

• Landlord’s PAN: The PAN card of the landlord is necessary in case the annual rental amount exceeds Rs. 1 lakh. 

• Form 12BB: This indicates the expenses eligible for tax exemptions through your employer

HRA Exemption Calculation

The HRA is calculated based on the following factors:

• Actual HRA received by the employer
• The actual rent amount paid to the landlord, including utility bills
• Salary which is inclusive of the basic salary, DA, and other pays
• Location of residence also affects the HRA, the HRA for metro cities will be higher as compared to non-metro cities

HRA Exemption = Actual HRA received OR (Rent paid - 10% of basic salary)

Please note that in the case of metro cities, it is 50% of salary instead of 10%, and for non-metro cities, it is 40% and the lower of the three values will be exempted from tax deductions. 

Example for HRA Exemption Calculation

Suppose you are a salaried individual living monthly salary is Rs. 60,000. Your employer gives you an HRA of Rs. 25,000 and your monthly rent of Rs. 20,000. Now, let's calculate the HRA exemption using the formula:

• Actual HRA Received: Rs. 25,000/month 
• 50% of Salary: (50% of Rs. 60,000) = Rs. 30,000 (as it is a metro city)
• Rent Paid minus 10% of Salary: (Rs. 20,000 - 10% of Rs. 60,000) = Rs. 14,000

Now, we take the minimum of the three amounts, which is Rs. 14,000.

Therefore, in this example, the HRA exemption would be Rs. 14,000 per month. The remaining HRA amount (Rs. 25,000 - Rs. 14,000) = Rs. 11,000 would be added to your taxable income. Moreover, the HRA exemption for the entire financial year would be calculated by multiplying Rs. 14,000 by the number of months for which the HRA is received.

Things to Know Before Claiming Deductions Under HRA

Before you set out to claim tax benefits on HRA, you need to be aware of several things such as those listed below:

• Tax Regime: You can get tax deductions on House Rent Allowance under the old tax regime only. The new tax regime has no provision for saving taxes on HRA. Thus, you need to be very careful while choosing the tax regime during the time of the Income Tax Declaration. 

• Landlord’s PAN Card: It is mandatory to submit the landlord’s PAN card, in case the annual house rent exceeds Rs. 1 lakh. So, if your annual house rent is more than Rs. 1 lakh and you are planning to avail tax benefits on HRA, then make sure to collect a copy of your landlord’s PAN card. 

• Rent Receipts: You need to maintain a clear and accurate record of rent payments whether you are paying online or through cash. The rent receipts serve as legal documents that support your tax exemptions. Additionally, you should also have a formal rent agreement in place with your landlord. This legal document outlines the terms of the lease, including rent amount, duration, and any other relevant conditions. If there are any changes in the agreement, then you must have a document supporting the same.

• Inform Your Employer: It is your responsibility you inform your employer about your tax exemptions on HRA. You also need to support the necessary documents to the employer, failure of which might result in the rejection of your claim request. 

• Rent Paid to Spouse: If the rent is paid to the spouse, then please note that you won’t be eligible for claiming tax benefits. 

Tax Benefits on HRA vs Tax Benefits Under Section 80GG

Here is a table that illustrates the differences between the two:

How to Claim Tax Exemptions on HRA?

Listed below are the steps you need to follow to claim tax exemptions on your House Rent Allowance:

• You need to first calculate the amount you can claim for exemptions on HRA
• Then, fill out the ITR form
• In the ITR form, fill out the HRA details, you need to mention both: the HRA received by the employer and the HRA amount exempted
• Next, submit the necessary documents such as rent receipts, form 12BB, rent agreement, etc
• Finally, submit the form 

Summing Up

Thus, it becomes clear that House Rent Allowance is a valuable component of your salary that can significantly reduce your tax burden. Now that you understand the claim process, HRA exemption calculation, and other intricacies, enjoy tax benefits on the house rent under the Income Tax Act of 1961. 

FAQs

• What are the factors affecting HRA calculation?

The factors affecting the calculation of HRA are the city of residence, actual HRA, salary, and HRA allowance offered by the employer.

• Can I get tax benefits on HRA If the rent is paid to my spouse?

No, you cannot get tax benefits on HRA if the rent is paid to the spouse.

• What if I don’t have an HRA component in my salary?

If you don’t have an HRA component in your salary and you are still paying rent, then in that case, you can claim tax benefits under section 80GG of the Income Tax Act of 1961.

• Which section of the IT Act offers tax rebate on HRA?

The section 10(13A) of the Income Tax Act of 1961 offers tax rebate on HRA.

• Is a landlord's PAN card a necessary document while claiming tax benefits on HRA?

Yes, the landlord’s PAN card is a necessary document in case the annual rent amount exceeds Rs. 1 lakh and you are claiming tax benefits on HRA.