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.
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:
Let us now take a detailed look at HRA calculations.
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:
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.
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:
Mr. Kumar wants to calculate his HRA exemption using the formula stated above. So, here is how he proceeds:
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.
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:
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.
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:
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:
However, here are some important points you need to consider about the deductions you claim under Section 80GG and HRA:
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.
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|
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.
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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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.
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
|Section 194IB||Section 44AA||Section 80E|
|Section 195||Section 80EEA||Section 80DD|
|Section 80CCC||Section 80GG||Section 80 G|
|Section 54F||Section 1941A||Section 10|
|Section 194Q||Section 192||Section 269SS|
|Section 80DDB||Section 44AD||Section 194C|
|Section 194A||Section 194H||Section 80D|
|Section 80C||Section 80C, 24(b), 80EE & 80EEA||Section 234A|
|Section 50C||Section 80C||Section 80EEA|
|Section 194B||Section 194J||Section 206C|
|Section 80CCG||Section 80 EEB||Section 24Q|
|Section 40b||Section 194C||Section 54EC|
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