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HRA Calculation and Exemption - Calculate your House Rent Allowance

January 19, 2023

What is HRA?

HRA refers to Housing Rent Allowance. Employers provide HRA to their salaried employees to help with rent payments. The HRA received by employees is eligible for certain tax deductions under Section 10(13A) of the Income Tax Act of 1961#.

How to Calculate HRA Exemption?

If you receive an HRA from your employer, you must understand how to calculate the exemption. You are eligible to receive an exemption that is the lowest of the following amounts:

• The actual HRA you receive
• 50% of your income (basic salary + dearness allowance) if you live in a metro
• 40% of your income (basic salary + dearness allowance) if you do not live in a metro
• Actual rent paid less 10% of your income (basic salary + dearness allowance)

HRA Exemption/Deduction

Let’s look at how the exemption and deduction work with an example. Mr Sharma works in Mumbai and earns INR 60,000 per month. He pays a monthly rent of INR 15,000 and receives a monthly HRA of INR 20,000. Let’s see how he can calculate his HRA:

• Actual HRA received = INR 2,40,000 per year
• 50% of income (since Mumbai is a metro) = INR 3,60,000 per year
• Actual rent paid less 10% of income = 1,80,000 – (10% of 7,20,000) = 1,80,000 – 72,000 = 1,08,000

Since the lowest amount of the three equals INR 1, 08,000, Mr Sharma can deduct INR 1, 08,000 from his taxable income.

HRA (House Rent Allowance) is one of the primary components of the salary of a person. HRA is that part of the salary that an employer pays to her/his employees for covering up the expenses related to accommodation. HRA depends on several factors, such as the salary of a person, the rent being paid, the basic component of the salary, location of the rented accommodation. Depending on some factors, exemption on HRA can be sought. For a person who actually lives in a rented house, exemption on HRA helps in income tax slab rates savings. However, if a person does not live in a rented house and yet is getting HRA as salary component, the full amount received as HRA is taxable.

It is important to understand the exact amount that is taxable. For any salaried person, the complete amount received as HRA may not be exempt from tax. Therefore, the whole procedure of HRA calculation and exemption must be clearly understood. There are certain parameters that decide what HRA is going to be or what is the limit of HRA exemption that can be had. Actually, HRA is the lowest of the below mentioned four factors:

1. The actual amount received as HRA from the employer.
2. The rent that you have actually paid reduced by 10% of the salary.
3. 50% of the basic salary, in case the place of residence of the tax payer is in a metro location.
4. 40% of the basic salary, in case the place of residence of the tax payer is in a non-metro location.

This also forms the basis of salary re-structuring (done by the employer) to help the employee save on taxes. This is helpful because the lowest of the above mentioned factors is eligible for exemption from income taxes.

In several cases, there have been instances when a person residing in an accommodation owned by her/his parents has claimed HRA tax exemption. However, this benefit can be availed of only if the property/residence in question is actually owned by the parents and the income from this rent (given by you) is stated as income by them while filing the income tax returns.

For the persons who live independently and pay rent to the tune of more than 1 Lac per annum, for claiming HRA tax exemption, the submission of the landlord's PAN card is mandatory. There is an important pointer here however. There may be salaried persons who do not get any HRA from their employers. Even such employees can seek tax exemptions under Section 80 GG of the Income Tax Act.

To understand the HRA exemption process in detail, it is important to understand with the help of a practical example. Let's take the example of a person X. Suppose X lives in New Delhi in a rented accommodation, where she pays Rs 10000 as monthly rent. Suppose X's basic salary per month is Rs 50000 and an annual component of Rs 1 Lac as HRA is also part of her annual salary package.

Then,

Actual HRA received by X = Rs.100000

Rent that she pays reduced by 10% of her basic salary = 120000 - 60000= 60000

50% of X's basic salary = 50% of Rs 600000 = 300000

Least of the above is Rs. 60000.

Therefore, X is eligible for HRA exemption of Rs 60,000.

You can calculate your HRA exemption online by providing certain basic information regarding your salary, location, HRA received etc.

HRA Rules

You must know all the HRA conditions to claim the relevant deduction. The HRA rules are as follows:

• Individuals can claim the HRA exemption if they pay rent to landlords or their parents as long as they furnish the rent receiver’s PAN with their tax documents.
• Taxpayers must submit rent receipts as proof to avail of the benefit.
• The PAN details are required for all rent amounts that exceed INR 1, 00,000 per year.
• Individuals cannot claim HRA exemptions if they reside in their own homes.

HRA Rules for Self-Employed Individuals

As a self-employed individual, you will not be able to claim the House Rent Allowance deduction available to salaried employees. However, you can avail a similar deduction on rent paid under Section 80GG of the Income Tax Act. HRA rules and regulations for self-employed individuals under this section as mentioned below:

Eligibility Criteria to claim tax deduction for rent payments u/s 80GG:

• You must be a self-employed or salaried individual not claiming the benefit of HRA Individuals wishing to claim an HRA deduction must fill up a self-declaration form in Form 10 BA.

• Individuals and HUFs are only eligible to can claim HRA tax deductions under Section 80GG.

Exceptions under Section 80GG

Situations when you cannot claim a deduction under Section 80GG is as follows:

1. You own a house where you are employed or run a business.

2. You have claimed the HRA during the year, such as working with a different employer and receiving an HRA deduction from the previous employment.

3. You cannot own any residential property under your name, or your spouse or child’s name in the same location as your workplace.

Rent Payments deductions u/s 80GG:

Least of the following will be exempted from tax:

• Rs 5000 per month;

• 25 % of Adjusted Total income

• Actual Rent Paid (-) 10% of Adjusted Total Income

HRA Rules for Salaried Individuals

Eligibility Criteria to Claim Tax Deduction on HRA

Once you know how house rent allowance is calculated, take a look at the conditions that make a person eligible to claim HRA tax deductions.

• You need to be a salaried individual to claim tax benefits on HRA.

• You must possess documents providing proof of rent paid for your accommodation. This means that even if you pay rent and your employer pays you HRA, you cannot claim tax deductions unless you furnish proof of your rented accommodation.

• HRA tax benefits are available under the old regime of income tax. When filing tax returns, you need to apply for the old regime to claim this benefit.

• You cannot claim an HRA tax deduction if you are living in your own house. The taxpayer must necessarily live in a rented accommodation to be eligible for this tax deduction.

HRA Exemption u/s 10(13A):

The amount which you can claim under the HRA tax deduction must be the lowest among these options.

• Actual rent paid less 10% of your basic salary + DA
• 50% of your basic salary + DA for people living in metro cities and 40% of your basic salary + DA for people living in non-metro areas.

Benefits of House Rent Allowance

Here are a few points that highlight the benefits of House Rent Allowances.

• If you are living in a metro city, you can receive as much as 50% of your basic salary as HRA. However, you will receive 40% of your base amount, if you are living elsewhere.

• If you are living with your parents or any other family member, you can claim HRA tax benefits by paying rent to them. However, you need to produce valid proof of payment.

• In case you own a house yet live in a different city, you can take advantage of the simultaneous discount for home loans against interest charges, principal amount, and HRA.

How to Claim for HRA?

Claiming an HRA deduction from your taxable income requires some paperwork. While filing taxes, you must furnish rent receipts and the landlord’s PAN if the rent amount exceeds INR 1, 00,000 per year. Alternatively, you can provide these documents to your employer to compute HRA exemption while deducting TDS. The Income Tax department verifies the information received through their portals, so you must always be honest about the amounts received and paid.

Claiming a Deduction under Section 80GG:

Salaried individuals who do not receive an HRA but live in rented properties can claim deductions under Section 80GG of the Income Tax Act#. You can claim a deduction under Section 80GG if you fulfil the following conditions:

• You are self-employed or salaried
• You have not received HRA at any time during the year for which you are claiming 80GG#.
• You or your spouse or minor child or HUF do not own any residential accommodation in the city where you currently reside.
• As per Rule 11B, you are required to file a declaration in Form No. 10BA to claim deduction under section 80GG# giving details of rent payment

The claim amount will be the lowest of the following:

• INR 5,000 per month
• 25% of your total income before allowing deduction for any expenditure under Section 80GG
• Actual rent as long as it is less than 10% of the total income

Important Rules to Remember for HRA Deductions

To know how the house rent allowance is calculated, you must know the specific rules set by the Income Tax Act. The points below highlight the HRA rules for salaried individuals under Section 10 (13A):

• A salaried employee can claim an HRA deduction only if HRA is a component of their salary package.

• Furthermore, the salaried person must live in a rented accommodation and have proof of rent paid.

• If the landlord is an NRI, there will be a 30% TDS from the rent payment.

• If you are living with your parents, you can opt for an HRA tax deduction by paying rent and furnishing a receipt as proof.

Several sections of the Income Tax Act allow taxpayers to save additional taxes besides the house rent allowance deduction. The following sections allow you to lower your tax burden through an insurance policy:

• Section 80 CCC: By opting for pension policies, you can claim tax deductions up to Rs. 1,50,000 against the premium paid towards this scheme.

• Section 80C: For premiums paid against life insurance, you can claim a tax deduction under this section. The deduction can be availed of the actual premiums paid but it will be limited to 10% of the death sum assured.

• Section 10 (10A): Any payment which you receive from the commutation of a pension policy is tax-exempt.

• Section 10 (10D): Returns from any life insurance policy are exempt subject to conditions under this section.

• Section 80D: As a policyholder, you can choose to claim deductions for premiums paid towards health insurance for self, partner, dependent children or parents.

You can avail tax deduction of up to Rs. 25,000 on the amount of premium paid on individual medical insurance under Section 80D of the Income Tax Act. This amount can be claimed for paying insurance premiums for yourself, spouse and dependent children. For paying premiums for senior citizen’s parents, you can claim additionally up to. 50,000/-

• Section 80CCE: The overall deduction limit under Sections 80C, 80CCC and 80CCD (1) is Rs. 1,50,000.

Other Ways to Save Tax than HRA

Besides these HRA deductions, you can also invest in any of the following to save on your income tax.

1) Home Loan Repayment

If you have an ongoing home loan, you can claim tax deductions of up to Rs. 1,50,000 under Section 80C for the principal part of the EMI you are repaying. However, it is important to note that the amount you will pay as interest will not qualify for tax deduction under this section.

2) Sukanya Samridhi Yojana

This scheme by the Government of India is beneficial for parents with a girl child below 10 years of age. By investing in this scheme, a person is eligible for tax deductions up to Rs. 1.5 lakhs under Section 80C. The current interest rate for this scheme is 8% p.a. The investment amount will generate returns for 21 years or till the girl child is married after 18 years.

3) Tax Saver FDs

Investments in tax-saver FDs are quite popular among middle and upper-middle-class Indians. A tax-saver FD has a lock-in period of 5 years, before which you cannot withdraw your invested amount. By investing in a tax-saving FD, you can claim a tax deduction up to Rs. 1.5 lakhs. The interest rate for tax-saver FDs currently ranges from 7%-8%. The interest earned is taxable as per your income tax slab.

4) Public Provident Fund

Public Provident Fund or PPF is a government savings scheme for long-term investment. It offers a tenure of 15 years and its interest rate changes once every quarter. Most importantly, PPF offers triple tax exemption. The amount deposited is exempt from taxes u/s 80C; plus the interest earned and maturity amount are tax-exempt as well. One can open a PPF account with a minimum balance of Rs. 500.

5) Employee Provident Fund

This is a popular scheme among salaried employees that focuses on retirement benefits. As per the EPF Act, an employer must contribute 12% of an employee’s Basic Salary and DA to their EPF account.

As per Section 80C, an employee can claim a deduction of up to Rs. 1.5 lakhs for his/her contribution towards EPF account.

6) National Savings Certificate

The National Savings Certificate is another popular fixed-income investment that can help you save taxes. The investment towards this scheme can offer a tax rebate of up to Rs. 1.5 lakhs under Section 80C.

Equity Linked Savings Scheme or ELSS is an equity mutual fund that comes with a lock-in period of 3 years. You can invest in an ELSS via SIP or lumpsum to enjoy tax benefits u/s 80C. Furthermore, this mutual fund will invest the amount in equity and equity-related instruments. Consequently, it can generate higher returns than other tax-saving alternatives. With an ELSS, you can claim a maximum tax deduction of Rs. 1.5 lakh in a year.

Summary on HRA

To conclude, you can claim HRA deductions by providing documents to prove you live in rented accommodation away from your home. Both salaried and self-employed individuals can claim deductions on rent as per Section 10(13 A) and Section 80GG, respectively. Calculating HRA manually can be quite tough and time-consuming. To save time and effort, you can opt for our HRA calculator for instant and accurate results as per your requirements.

FAQ's On House Rent Allowance

Q1. What is the formula to calculate the HRA?

To calculate HRA, you must consider the lowest value among these- a) actual rent paid minus 10% of the basic salary b) 40% of basic pay from non-metro city people and 50% from those living in metro cities c) actual HRA received.

Q2. What are the 3 conditions for HRA exemption?

To claim HRA exemption, you must receive HRA as a part of your CTC, live in rented accommodation and submit valid documents as your residence proof.

Q3. Is HRA mandatory?

HRA is a part of your salary so it eventually becomes a part of your taxable income. However, if you are living in a rented accommodation, you can opt for a tax exemption on your HRA while filing ITR.

Q4. Can I claim tax exemption on HRA and deduction on home loan interests at the same time?

Yes, you can claim tax deductions from both HRA and home loan interest at the same time.

Q5. How much house rent allowance can be claimed?

An employee can claim a maximum of 50% of their basic salary as an HRA exemption.

Q6. What is Form 10BA?

It is a declaration that has to be filed by an individual who wants to claim a deduction under section 80GG that you are not claiming the benefit of a self-occupied property on the house in the same city or location where you are employed.

Q7. Can I claim 80GG in the new tax regime?

No, section 80GG is part of Chapter VI-A. The New Income Tax regime doesn’t allow any exemptions under Chapter VI-A. Hence, you cannot claim a deduction under section 80GG.

Disclaimer

# The above stated tax benefits are subject to the provisions & conditions mentioned in the existing Income Tax Act, 1961. Tax Laws are also subject to change from time to time. This material has been prepared for information purposes only, should not be relied on for tax or accounting advice. It is requested to seek tax advice of your Chartered Accountant or personal tax advisor with respect to your personal tax liabilities under the Income-tax law.

Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

Written By:
Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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