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. Hence, organizations often compensate employees for this expenditure by paying them HRA.
HRA’s full form in salary slip stands for House rent allowance. It is a part of the salary that employees receive over and above their basic pay for meeting accommodation expenses.
1. What is HRA or House Rent Allowance?
HRA or house rent allowance is a benefit provided by employers to their employees to help the latter cover their accommodation expenses or the cost of renting a house.
You can claim a deduction for HRA under Section 10(13A) of the Income Tax Act but remember it can be fully or partially taxable. The calculation of HRA deduction depends on multiple factors such as:
- Your salary
- HRA received
- Actual rent paid
- City of residence
2. Eligibility Criteria To Claim Tax Deduction On HRA
House rent allowance is eligible for HRA deduction under Section 10(13A) of the Income Tax Act if an individual meets the following criteria:
- The person claiming HRA deduction is a salaried or a self-employed individual.
- The person must be living in a rented house. HRA tax calculations cannot be made for living in your own house.
- You should be able to produce a proof for rent paid such as a valid house rent receipt.
This means that if you do not pay rent, you cannot claim an HRA deduction even if your employer pays you HRA as part of your salary.
3. HRA Calculation Formula With Example
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:
- The HRA your employer pays you
- Actual rent paid for accommodation minus 10% of basic pay
- 50% of basic salary plus dearness allowance if you live in a metro city (Mumbai, Delhi, Kolkata, or Chennai) or 40% of basic salary plus dearness allowance if you live in a non-metro city
The house rent allowance calculation or HRA formula is to calculate the three aspects above and claim the lowest as HRA deduction under Section 10(13A) of the ITA.
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.) |
|---|---|
| Basic Pay | 25,000 |
| HRA | 8,500 |
| Allowances | 8,500 |
| PF | 3,000 |
| Total Salary | 45,000 |
Using the HRA calculation formula, Mr. Ramanath gets:
- An annual HRA of Rs. 1,02,000 from the employer (₹8,500 X 12 = ₹1,02,000)
- An annual rent of ₹84,000 that he actually pays. However, we need to apply the HRA percentage formula, which is actual rent minus 10% of basic pay. This comes to ₹54,000 (₹7,000 x 12 – ₹30,000 = ₹54,000)
- Pune is a non-metro city. Therefore, 40% of basic salary would amount to ₹1,20,000 (40% x ₹3,00,000 = ₹1,20,000).
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.
4. HRA Taxation Rule in India?
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.
5. Tax Benefits of HRA
HRA deduction under Section 10(13A) of the ITA has the following benefits:
- The biggest advantage of the HRA rebate is that it reduces your taxable income.
- You can claim deduction on HRA in income tax filing even if you live with your parents, as long as you produce proof of paying rent.
- You can claim HRA tax benefit even while paying EMI on a home loan as long as the house is not located in the city of employment/ residence. In case you own a house in the same city as employment and living, you will need to produce a valid explanation as to why you cannot live there in order to claim the HRA exemption.
6. Important Points To Remember For Claiming HRA Deduction
- You do not automatically become eligible to claim HRA exemption if your employer pays you HRA as part of your salary. You will have to be living in a rented accommodation to claim HRA tax exemption.
- The entire HRA paid to you cannot be claimed as an exemption. The lowest of annual rent actually paid minus 10% of basic salary, HRA paid by the employer and 40%/50% of salary depending on where you stay can only be claimed.
- For HRA calculation purposes, only Mumbai, Delhi, Chennai, and Kolkata are considered metro cities. All others are non-metro cities.
- You can claim an HRA deduction even if you are staying with your parents, as long as you produce proof of rent payment, such as rental receipts or bank transfers. However, your parents will need to show this as income while filing their returns.
- Rent paid to a spouse is not eligible for HRA deduction.
- If the annual rent paid exceeds ₹1,00,000, then the landlord’s PAN will be required to claim HRA exemption. If they do not have a PAN, a signed declaration will be required.
7. How to Claim Deduction if You Do Not Receive HRA
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:
- ₹5,000 per month, i.e. ₹60,000 per annum
- 25% of gross total income
- Actual rent paid minus 10% of the gross total income
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:
- ₹60,000
- 25% x ₹6,00,000 = ₹1,50,000
- Actual annual rent minus 10% of income, which is ₹2,40,000 – ₹60,000 = ₹1,80,0000
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:
- Deduction under Section 80GG is available only for those who do not receive HRA. This includes members of Hindu Undivided Families, self-employed people, and salaried individuals who do not receive HRA from their employer.
- The maximum deduction allowed under Section 80GG is ₹60,000.
- You cannot claim deduction under both Section 10(13A) and Section 80GG
- Just like under Section 10(13A), the individual, their spouse, or minor child cannot own property in the city of residence to claim the benefit.
- Individuals seeking to claim this deduction will have to submit a form 10-BA which is a self-declaration stating that they meet all conditions mentioned above.
8. Documents Required to Claim HRA Tax Exemption
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.
9. Frequently Asked Questions (FAQs)
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:
The HRA paid by the employer
Actual rent paid for accommodation minus 10% of basic pay (salary + dearness allowance)
50% of basic pay for those living in a metro city or 40% of basic pay for those living in a non-metro city
For self-employed individuals, HRA is the lowest of:
₹60,000
25% of gross total income
Actual rent paid minus 10% of the gross total income
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.
