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Many times, people have to move to a different city in order to work. In such cases, they may end up paying rent for accommodation. Organizations often compensate employees for this expenditure by paying them a house rent allowance over and above their basic pay. This is usually a part of the salary structure. However, HRA is eligible for income tax exemption and can be a great way to reduce your taxable income.
The full form of HRA in salary is house rent allowance. It is an amount that an employer pays an employee to compensate for rent paid to live in the place of employment. While deduction for house rent allowance under Section 10(13A) of the Income Tax Act is allowed, HRA may be fully or partially taxable. The HRA deduction calculation depends on your salary, the HRA received, the actual rent that you pay, and the place of your employment and residence. Even self-employed individuals can claim HRA tax benefits.
House rent allowance is eligible for HRA deduction under Section 10(13A) of the Income Tax Act if an individual meets the following criteria:
HRA calculations are based on a number of factors, including your salary, the HRA you receive from your employer, the actual rent you pay, and whether you live in a metro or a non-metro city. However, when computing the HRA tax calculation, the amount of exemption will be the lowest of:
Consider the following example for a better understanding of the HRA formula:
Mr. Gopal Ramanath lives and works in Pune. He has a rented accommodation, paying Rs. 7,000 per month. His monthly salary is Rs. 45,000, with the following break up:
|Component||Amount (INR/ Rs.)|
Using the HRA calculation formula, Mr. Ramanath gets:
The maximum deduction that Mr. Ramanath can claim under section 80C of the ITA as HRA deduction would be the lowest of the three amounts, ₹54,000.
The remaining ₹48,000 of the HRA allowance will be taxable as per Mr. Ramanath's income tax slab. If you are still not convinced that you can calculate your HRA using pen and paper, don't worry you can use the free online HRA Calculator instead.
HRA exemption rules state that HRA deduction is only allowed for salaried and self-employed individuals who live in rented accommodation. This means that even if your salary structure has an HRA section or component if you are not paying rent, the entire amount will become taxable.
Taking Mr. Ramanath's example, if he did not pay rent, then the HRA of Rs. 84,000 paid to him by his employer would be taxed under his applicable income tax bracket.
For self-employed individuals who do not receive an HRA component, HRA rules allow the benefit of claiming HRA exemption under Section 80GG of the ITA. This is the route that even salaried individuals paying rent can take in case their employer does not pay HRA.
Therefore, while calculating HRA exemption, it is important to understand whether you can claim the deduction under Section 10(13A) or Section 80GG of the ITA.
HRA deduction under Section 10(13A) of the ITA has the following benefits:
Self-employed and salaried individuals who do not receive an HRA cannot claim house rent allowance deduction under Section 10(13A) of the ITA. However, they can still avail the benefit of rent exemption under Section 80GG of the Income Tax Act.
Under Section 80GG, an individual can claim the least of the following in lieu of the house rent they pay:
For instance, let us assume that Ms. Gayathri Nair, living in Chennai, is self-employed and makes an annual gross total income of Rs. 6,00,000. She pays rent of Rs. 20,000 a month. The tax exemption she can claim under Section 80GG while filing her taxes is the lowest of:
Finally, the deduction Ms. Nair can claim under Section 80GG of ITA is ₹60,000.
When understanding the difference between what is HRA and the deduction claimed under Section 80GG, here are some points to keep in mind:
In order to claim HRA tax exemption, an individual will need to submit certain documentation proofs. This includes rental receipts that show the rent used for HRA deduction calculation or the rental agreement with the equivalent rent amount mentioned.
Additionally, if the rent exceeds ₹1,00,000 per annum, then a copy of the landlord's PAN card or a signed declaration form from them is required. For rent paid to family members or parents, the same proofs will be needed for HRA tax calculation.
HRA deduction can be claimed under Section 10(13A) for salaried individuals and under Section 80GG for self-employed individuals or salaried people who do not get HRA.
For salaried individuals, HRA is the lowest of the following:
For self-employed individuals, HRA is the lowest of:
The amount of HRA you can claim depends on the salary, HRA received, the annual rent paid, and the place of residence. For salaried individuals, it is usually the lowest of HRA paid by an employer, actual rent paid for accommodation minus 10% of basic pay, or 40%/50% of basic pay for those living in non-metro/metro cities
HRA is computed annually.
No. HRA exemptions can be claimed under Section 10(13A) or Section 80GG.
Yes. Even if you have forgotten to submit rental receipts, you can claim an HRA rebate while filing your income tax returns. All you have to do is manually calculate the HRA tax exemption using the formula mentioned above and then report this as an expense under Section 10(13A) in ITR1. You will also need to declare this in Form 16 - Part B.
Yes. Rent paid to family members, including parents, can be claimed as an HRA deduction as long as there is a valid proof of payment. However, rent paid to a spouse is not eligible for deduction.
No. HRA deductions are allowed only for rent payment. Maintenance charges, electricity charges, utility payments, etc. are not included.