What is House Rent Allowance (HRA)? – Exemptions, Deductions & Calculation
House Rent Allowance is a standard component under most salary structures in India. While it is included in the compensation of all employees, only those who pay house rent, can claim tax deductions against it.
While almost everyone has heard about HRA, many are unaware about the HRA exemption rules and how it is calculated. In this blog, we will introduce you to the basics of HRA tax computation.
What is House Rent Allowance (HRA)?
House Rent Allowance (HRA) is an important component in an employee’s payslip. It is paid by an employer to compensate an employee for the home rent they have to pay.
A notable aspect of HRA is that unlike basic salary, it is not fully taxable. In fact, one can claim tax deduction under Section 10(13A) of the IT Act, 1961, subject to certain conditions. The HRA exemption is deducted from the total income of the employee before arriving at the gross taxable income However, you cannot claim HRA tax exemption if you live in your own home or don’t pay any rent.
Some of the factors influencing the calculation of an individual’s HRA are as follows:
- Salary amount
- HRA amount
- Amount paid as rent
- Location of employment
- Place of residence
Let us now take a detailed look at HRA calculations.
How is HRA Calculated?
As mentioned earlier, there are several factors influencing the HRA component in one’s salary. However, your HRA exemption depends on Rule 2A of the Income Tax rules. In fact, the amount exempted under Section 10(13A) of IT Act will be the least among the following:
- The actual HRA received by an employee
- 50% of basic salary + DA (if applicable), for those living in metro cities, such as Delhi, Mumbai, Chennai and Kolkata. For those living in non-metro cities, 40% of the basic salary + DA (if applicable)
- Rent paid – 10% of the basic pay
To determine your HRA exemption, you must consider all three points stated above. However, only the lowest of the three can be claimed as an HRA deduction under Section 10(13A) of IT Act, 1961.
Example of HRA Calculation
Let’s assume that Mr. Kumar lives in a rented accommodation in Kolkata and works for a private organisation. He pays ₹7,000 as house rent every month. Amit Kumar’s monthly salary is ₹40,000. This is how his salary structure might look like:
| Component | Amount |
| Basic Pay | ₹20,000 |
| Allowances | ₹6,000 |
| HRA | ₹10,000 |
| PF | ₹4,000 |
| Total Salary | ₹40,000 |
Mr. Kumar wants to calculate his HRA exemption using the formula stated above. So, here is how he proceeds:
- Annual HRA of ₹1,20,000 from his employer
- Kolkata is an urban city, so 50% of his yearly basic salary would be ₹1,20,000.
- The total rent paid by Mr. Kumar in a year is ₹84,000. But, we need to subtract 10% of the annual basic pay from that amount. So, it would be ₹60,000 (=₹7,000 x 12 – ₹24,000).
So, going by HRA exemption rules, his HRA deduction would be the lowest of the three amounts, i.e. ₹60,000. But, the remaining amount, i.e. ₹60,000, will be taxed according to his income tax slab.
However, to avoid errors and to make matters easier, you could use any free HRA calculator available online.
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HRA Exemption Rules and Tax Deductions
According to HRA tax exemption rules, self-employed and salaried people, who pay rent for their accommodation, can claim an HRA deduction. In other words, if you do not have to make rent payments, but your salary structure includes the House Rent Allowance, then the amount will fall under taxable income.
With that in mind, let us look at how HRA applies to salaried and self-employed individuals:
1. HRA for Salaried Employees
Salaried individuals are eligible for availing HRA exemption u/s 10 (13A) of IT Act, 1961. It enables them to reduce their taxable salary either wholly or partially.
2. HRA for Self Employed
Self-employed people can also claim the HRA exemption while filing their Income Tax Returns under Section 80GG. Please note that the exemption cannot be availed under Section 10(13A) of the IT Act.
Here are some additional rules of HRA exemption you should be aware of:
- If you are paying rent to your parents, you can claim the HRA exemption, provided you have the receipts to back up your claim.
- However, you cannot claim HRA exemption by paying rent to your spouse.
- If your rent exceeds ₹1 lakh in a financial year, you need to submit your PAN details.
- Homeowners with home loans and HRA can claim tax exemptions on their HRA and tax deductions on their home loans.
How to Claim Deduction Under Section 80GG?
Self-employed and salaried individuals can claim HRA exemptions even if they do not get House Rent Allowance u/S 80GG of the Income Tax Act. As per this section, people can claim the least among the following instead of house rent:
- 25% of gross total income
- The rent paid – 10% of the gross total income
- ₹,5000 per month or ₹60,000 per annum
However, here are some important points you need to consider about the deductions you claim under Section 80GG and HRA:
- The provision of claiming deductions u/S 80GG of the IT Act is applicable only to such people who don’t receive a House Rent Allowance as a part of their salary structure.
- It includes self-employed individuals, salaried people, and members of the Hindu Undivided Family (HUF).
- A person can claim HRA deductions either under Section 10(13A) or Section 80GG, but not both.
- The maximum deductible amount u/s 80GG is ₹60,000.
- To avail of tax benefits u/s 80GG, the individual, their spouse, or their minor child should not be property owners in the place of their residence. The same applies to Section 10(13A).
- Moreover, individuals seeking tax exemptions u/s 80GG, cannot seek tax benefits for properties they own in other parts.
- To claim deductions u/s 80GG, one needs to submit Form 10-BA. This is a self-declaration where the taxpayer has to state that they meet all the terms and conditions of HRA deduction rules.
Documents Required to File and Claim HRA Tax Exemptions
- If the amount of rent paid during a financial year is more than ₹1,00,000, you need to provide your PAN along with a photocopy of the PAN card of your landlord or property-owner.
- You must also submit your house rent receipts. These receipts must include the following details:
- Tenant’s name
- Date of rent payment
- Name of the landlord/property-owner
- Address of the rented accommodation
- A revenue stamp
- Duration of stay
- Signature of the landlord on the revenue stamp
- You must also submit photocopies of your rental agreement, if required and rental receipts for the previous four months
Eligibility Criteria to Claim Tax Deduction on HRA
- The person who wishes to claim tax deductions for HRA must be either salaried or self-employed.
- The taxpayer must submit proof of house documents or house rent receipts to claim deductions for HRA.
- Only those living in rental properties can claim HRA exemptions.
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How to Claim HRA when Living with Parents?
Suppose Rima works at a multinational company in Chennai and lives with her parents at a property they own. But HRA forms an integral component of her salary structure. Can Rima claim HRA deduction? Let’s have a look.
Yes, Rima can, provided the house she is living in is owned by her parents and she follows the steps listed below:
Step 1: Rima has to establish that she is living as a tenant in a house owned by one or both of her parents.
Step 2: Rima must pay the rent directly to her parent’s bank account. The other option could be to issue cheques drawn in her parents’ name.
Step 3: To claim HRA exemption, Rima must have a valid rental agreement between her and the house owner, which in this case is one or both of her parents.
Can I Claim HRA and Deductions on Home Loan Interest Rate?
Yes, you can. The following table provides further details:
| Case | Is the benefit of a tax deduction on a home loan and HRA exemption available? |
| You live in a rented property and have a home loan on a residential property in a different city | Yes |
| You have availed of a home loan to acquire an under-construction property and so you have to stay at a rented accommodation | Yes |
| You are living in rented accommodation due to work/children’s education while having a home loan on a different property in the same city | Yes |
Union Budget Highlights in House Rent Allowance (HRA)
Nirmala Sitharaman, the Finance Minister of India, presented the Union Budget for the financial year 2023 – 2024 on February 1, 2023. There were no changes announced for HRA exemption. So, people can continue to use the same method to calculate and claim tax exemption on House Rent Allowance as they did in the previous financial year.
Final Word
If you’re a salaried employee, then based on your salary structure, the total compensation, and the city you live in, you may receive a House Rent Allowance from your employer. If you live in a rental property, you can enjoy tax benefits under Section 10(13A) of IT Act, 1961. But, if you don’t receive an HRA from your employer or you’re self-employed, you might still get HRA tax exemption under Section 80GG, provided you satisfy certain conditions, which have been detailed above.
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FAQs
You need to file ITR (Income Tax Return) 1 if you plan to seek exemptions on House Rent Allowance. But, if your income exceeds ₹50,00,000 in a year, you need to file the ITR-2 form.
An employee needs to submit PAN details of the employer if the total amount paid as rent exceeds ₹1 lakh in a financial year.
If you own a residential property in Chandigarh which provides you with rental income, or you own a house in the city but live in rented accommodation, you cannot avail HRA.
When you don’t find HRA mentioned separately in Form 16, it indicates that your employer has not provided the component of HRA separately. You can claim the HRA as an exemption under Section 10(13A) only when your employer provides HRA separately. Otherwise, you can show it as rent u/s 80GG of ITA to claim its tax benefits.
No, an individual can seek deductions for HRA on the amount paid for rent only. Maintenance charges, utility payments, and electricity charges cannot be included under HRA.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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