If you are a salaried individual, you should pay special attention to how your salary is structured as you can get a lot of allowances for tax exemptions. One such allowance that every salaried employee receives is the house rent allowance, also known as HRA. As per the HRA component of your salary, you may claim HRA exemption in income tax on the rent you pay, no matter how small or big the rent amount is.
All salaried employees living in a home owned by another party; whether it is a landlord or your parents, with whom you are living, can avail this HRA tax deduction. This is a benefit provided by the Government of India aimed at making rent expenditure affordable. Individuals may structure their HRA on their own.
HRA exemption is provided under Section 10-13A of the Income Tax Act. As per this section, the following rules apply:
This tax deduction is the lowest amongst the HRA provided by your employer. Salaried individuals living in one of the 4 Indian metro cities of Mumbai, Delhi, Chennai and Kolkata can avail HRA tax exemption on 50% of the basic component of their salaries whereas those living in all other Indian cities may avail this tax exemption on 40% of the salaries’ basic component.
The HRA deduction is also the lowest on the actual amount paid towards rent by salaried employees each month, minus 10% of the basic component of the salary.
Individuals who are paying over ?100,000 in rent annually can avail the HRA tax benefit by submitting the PAN details of their landlord, parent or property owner. They may also be asked to provide rent receipts or bank statements proving the transfer of rent amount via cheques or NEFT/IMPS transfers.
In case an employee is unable to submit the rental agreement or rent receipts, the employer may deduct a higher TDS amount from the employee’s salary. However, you can still claim HRA deduction in income tax when income tax is filed.
Let us understand the house rent allowance tax benefit with the help of an example. Consider the below as the bifurcations of your salary and assume that you are living in an Indian Metro City; Mumbai for instance.