House Rent Allowance, or commonly known as HRA, is an amount which is paid by employers to employees as a part of their salaries. This is basically done as it helps provide employees with tax benefits towards the payment for accommodations every year. The decision of how much HRA needs to be paid to the employee is made by the employer on the basis of a number of different criteria such as the salary and the city of residence.
Regulated by the provisions of Section 10(13A) of the IT Act, the house rent allowance serves to be quite beneficial to salaried employees in India.
As per law, only salaried employees can claim HRA and self-employed individuals are exempt from doing the same. HRA, as an exemption is provided, only if the employee is living in rented accommodations. However, also in case the employee lives in his or her own house and does not pay any rent, he or she cannot claim HRA to save on taxes.
Primarily, HRA is decided based on the salary. However, there are some other factors that also affect HRA, such as the city in which the employee resides. In case the individual resides in a metro city, then he/she is entitled to an HRA equal to 50% of the salary. For cities other than a metro, the entitlement is 40% of the salary.
In order to calculate the HRA, the salary is defined as the sum of the basic salary, dearness allowances and any other commissions. If an employee does not receive a commission or a dearness allowance, then the HRA will be around 40% - 50% of his/her basic salary.
The actual HRA offered, in all probability, will be the lowest of the following three provisions:
The actual rent that is paid should be less than 10% of the basic salary.
In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a a non-metro city.
The actual amount received as the HRA from the employer.
HRA or The House Rent Allowance serves as a crucial component of an individual's salary. It defines the total amount allotted by the employer towards the employee's accommodation as rent. The amount allotted for HRA proves to be beneficial for an employee as it is calculated for tax deductions for a particular financial year. HRA also helps in reducing the taxable income that you are liable to pay. The tax benefits associated with HRA are only applicable for those salaried individuals who stay in a rental accommodation. If an employee stays in his or her own house, he or she is not eligible to claim the amount for tax deductions.
Calculation of HRA is based on a number of factors, such as the entitlement to 50% of the basic salary, if the employee is residing in a metro city and 40% in case he/she stays in any of the other cities. The calculation of HRA for tax benefit is considered from any of the following three listed provisions:
The actual rent that is paid should be less than 10% of the basic salary.
In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a a non-metro city.
The actual amount allotted by the employer as the HRA.
The least of the aforementioned amount will be considered for tax deduction from HRA.
Example: In order to understand how to calculate HRA for an employee, let us consider an example of Mr. Ajay Sharma. Ajay resides in New Delhi in a rented accommodation, paying a rent of Rs. 10,000 per month. Here’s what his payslip looks like-
| Employee Number- 1008 | Ajay Sharma | Amounts | |
|---|---|---|---|
| Basic | 30,000 | PF | 2000 |
| HRA | 13,000 | Professional Tax | 200 |
| Conveyance | 3,000 | ||
| Special Allowance | 2,000 | ||
| Medical expenses | 1,250 | ||
| LTA | 5,000 | ||
| Total Earnings | 54,250 |
For the purpose of calculating Mr. Ajay’s HRA that is exempt from Income Tax, we have the following information:
His basic salary is Rs. 30,000 per month, which will be considered since there is no commission or dearness allowance
HRA provided by company is Rs. 13,000 per month
10% of the annual basic salary comes to Rs. 36,000
Now, let’s calculate the same in the following three scenarios:
Amount received as HRA from employer = Rs. 13,000 X 12 (months) = Rs. 1,56,000
Or, Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
50% of basic salary since he lives in a metro = Rs. 1,80,000
Hence, based on the above calculation, it is evident that the HRA amount, which will be exempt from tax for Mr. Ajay, will be Rs. 84,000 as that comes to be the least of the three amounts in the scenarios stated above.
The rules that are applicable for HRA claims are listed as follows-
Your allotted HRA cannot exceed more than 50% of your basic salary.
As a salaried employee, you cannot claim for the full rental amount you are paying. Your exemption will be based on the least of the below mentioned options:
The actual amount allotted by the employer as the HRA.
Actual rent paid less 10% of the basic salary.
50% of the basic salary, if the employee is staying in a metro city (40% for a non-metro city).
You can also avail tax benefits of HRA along with a home loan.
In case you stay with your parents, you are eligible to pay rent to your parents and collect a receipt for HRA claim. However, similar rules don't allow you to pay rent to your spouse and claim a tax exemption.
If the annual rent of your accommodation exceeds Rs.1,00,000, then presenting the landlord's PAN card is mandatory. Also, in case the landlord does not have a PAN card, he/she can provide a self-declaration.
Another important rule is that in case your landlord is an NRI, you must deduct 30% tax from the rent amount that needs to be declared.
A major benefit of the house rent allowance is that it serves as a medium to reduce the taxable income, which therefore leads to a reduction in the tax that you have to pay.
Is it possible to claim HRA if I live in my own house?
No. If you live in your own house, then you cannot claim HRA.
Do home loan interests help me in claiming HRA and deduction on home loan interests?
In a certain situation, where you own a house, but still choose to stay in a rented accommodation because of any particular reason, you can claim your house rent allowance and exemptions on the home loan interest at the same time.
Do I have to produce rent receipts while claiming HRA?
Yes, in case the monthly rent exceeds Rs. 3,000, then rent receipts will be needed. However, if the rent paid monthly is up to or lesser than an amount of Rs. 3,000, rent receipts need not be provided.
Can I claim HRA for two houses?
Unfortunately, no. The HRA benefits are available for only one house in the concerned city of the workplace.
What documents are required for HRA exemption?
For HRA exemption, you will require producing the Rent Receipts. In case, your rent amount exceeds Rs.15,000 per month / Rs. 1 Lakh annually, then either the PAN card of the landlord or a written consent (stating the PAN is not available) from the landlord is required.
Does HRA include electricity charges?
No, electricity charges cannot be claimed as HRA. The electricity charges are not considered as the landlord's earning since it is paid to the electricity provider.
Is HRA inclusive of maintenance charges?
No, HRA is paid towards rent only. You won't be able to claim the maintenance fee as HRA. The maintenance charges are not considered as the landlord's earnings to be calculated for his/her income tax.
Does HRA fall under 80C?
No, House Rent Allowance falls under Section 10(13A).
How do I claim my HRA without landlord's PAN card?
If the annual rent exceeds Rs 1,00,000 per annum, it is compulsory for the employee to obtain the PAN card from the landlord. The PAN card is furnished as a proof when one submits the HRA claim. In case the landlord does not have a PAN, a declaration needs to be presented which includes details of the landlord such as landlord's name, address, the rent amount you are paying, and the period of accommodation.
When is HRA applicable?
HRA is applicable for employees who stay in a rented accommodation. It forms a part of the salary given by an employer to support the employee's accommodation.
How to calculate your HRA?
HRA or House Rent Allowance is a common component of an employee's salary package. It is given by an employer to help the employee meet the cost of renting a home. HRA calculation is done as per the employee's salary. Another factor that determines how much is paid out in HRA is the city where the employee resides in.
For the purpose of HRA calculation for tax deduction, the least of the following three will be considered:
