Anyone who is a salaried individual has seen the abbreviation ‘HRA’ on their salary slip. Put simply, HRA stands for House Rent Allowance and is a part of the salary that goes towards expenses of rented accommodation. It provides tax benefits to the employee under the Income Tax Act Section 10 (13A).
Let’s take a look at what HRA is, who is eligible for it, how it is calculated, and understand more about it.
Who can claim HRA?
HRA can only be claimed by salaried individuals who live in rented accommodation. They would get partial or complete tax exemption with HRA. Those who don’t live in rented accommodation cannot claim this exemption. This allowance would be fully taxable for such individuals.
How is HRA calculated?
There are several criteria that decide how much HRA is given. One of the most important factors is the salary. Another factor is the city of residence as the cost of accommodation can vary from place to place. In a metro city, the HRA is calculated as 50% of the employee’s salary. In non-metro cities, this is taken as 40% of the employee’s salary.
In order to calculate the HRA, let’s look at the definition of a salary first. Typically, a salary is taken to be the sum of the basic salary, the dearness allowances, and other commissions. If there are no commissions or allowances, the HRA is calculated to be in the range of 40% to 50% of the basic salary.
Usually, HRA is taken to be the lowest of any of the three provisions given below:
- The actual HRA
- The actual rent (which should be lower than 10% of the basic salary)
- For metro cities, 50% of the basic salary and for non-metro cities, 40% of the basic salary.
The amount that is considered for tax deduction is the amount that is the lowest among the three given above.
HRA calculation example
To know how much of your HRA will be exempt from income tax, let’s take an example of a person earning a salary of Rs.30,000 with an HRA of Rs.13,000 provided. So in the three scenarios given above, the actual HRA per year is Rs.1,56,000 (13,000 multiplied by 12). The actual rent that is paid that is less 10% of the basic pay is Rs.84,000 (10,000 x 12 – 36,000). For a metro city, 50% of the basic would be Rs.1,80,000. In this case, the least of the three is Rs.84,000 so that would be the HRA that is exempt from tax.
Benefits of HRA
HRA helps in reducing your taxable income because it is deducted from the taxable part of your income. Those who have taken a home loan will be aware that there is a tax deduction available on the interest part of the home loan. Even if you have taken a home loan and are eligible for a tax deduction on the home loan interest amount, you can still claim for HRA allowance tax exemption benefits.
Claiming HRA deduction even without HRA
Did you know that you can still claim your HRA even if your employer does not provide you with HRA allowance? If you are paying rent towards an accommodation, whether it is unfurnished or furnished, and your employer does not provide HRA allowance, the Income Tax Act under Section 80GG allows you to still claim your HRA deductions. To avail the deduction in such a situation, the following criteria has to be fulfilled:
- There is no HRA received by you during the year that you are claiming for it under Section 80GG.
- You are either salaried and not receiving HRA or you are self-employed and not receiving HRA.
- You do not own a residential accommodation where you reside or work (and neither does your spouse or a minor child or a Hindu Undivided Family (HUF) if you are a member of one).
If you do own property at the place of residence or work, and you still want to claim HRA deduction, then your property would have to be let out. Benefit of property that is owned cannot be claimed as occupied by self.
Can you claim HRA deduction if living with parents?
This is a common scenario. If you are being provided with an HRA allowance by your employer, you can still enjoy the tax benefits of it if you are living with your parents. All you have to do is pay them a certain amount as rent every month (entering into a rental agreement with them). The rent that is paid to your parents will have to be shown in their income tax returns while you can claim save taxes with your HRA deduction. This will lead to tax savings for both parties which is a win-win situation for all.
Points to be noted when claiming HRA
If your rental amount is more than Rs.1 lakh per annum, then you will have to furnish your landlord’s Permanent Account Number (PAN). Without this, you cannot claim HRA exemption. If your landlord does not have a PAN, he/she has to give you a declaration based on the circular dated 10 October 2013 No.8/2013.
HRA is an easy way to reduce your taxable income and have more savings in hand. So, make use of this by following the points given above and claim your HRA. Refer Bankbazaar Site to cover vast knowledge about HRA, Benefits, Rules etc