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.
Who can avail HRA exemption?
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.
How does HRA tax exemption work?
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.
How to claim the HRA benefit
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.
|Salary bifurcation||Monthly Salary in INR||Annual Salary in INR|
|House Rent Allowance||₹15,000||₹180,000|
Now let’s say you are paying a monthly rent of ₹13,000. But you have not submitted the rental agreement to your employer due to which your TDC deduction has increased.
To claim your HRA exemption, you need to calculate the taxable allowance. The minimum portion that is tax-exempt is calculated as under
Actual HRA received p.a. – 15000 x 12 = 180,000
50% basic salary for metro city – 25000 x 50% x 12 = 150,000
Excess of rent paid annually over 10% of basic salary (13,000- 25,000 X 10%) x 12 = 126000
Tax benefits on home loans for houses given on rent
Tax benefits can also be claimed by you if you own a home (taken on loan) and have rented it to someone else, while also living in a rented house yourself. For instance, you may own a home in Pune and may have rented it, while living in a rented house in Mumbai. In such a case, you may avail HRA tax benefits on both, your home loan and the rent you are paying. This benefit can only be availed if you own a home in one city and are living on rent in a different one. You also need to submit details of the income earned from renting your own home and pay the taxes associated with it.
The HRA benefit is one that can be availed by every individual and can amount to a lot of savings. It is therefore important to have it structured well in your salary so that you can avail all benefits provided under this Section of the IT Act.