HRA : House Rent Allowance

HRA full form – House Rent Allowance (HRA) is a component of most workers’ pay packages. HRA is not entirely taxable, even though it is a part of your salary. A portion of HRA is excluded from taxation under Section 10 (13A) of the Income Tax Act of 1961, subject to some provisions.

Until calculating taxable income, the sum of HRA exemption is deducted from the overall income. Which allows an individual to save money on taxes.

However, bear in mind that if an employee lives in his or her own home and does not pay rent, the HRA collected from his or her employer is entirely taxable.

Tax Exemption from HRA

The sum that should be deducted is the least of the following:

1. The actual HRA received;
2. 50% of [basic salary+DA] for the ones living in metro cities [40% for non-metros];or
3. Actual rent paid less than 10% of basic salary + DA    

Who can avail HRA?

This tax incentive is only applicable to salaried people who have an HRA portion of their pay structure and live in rental housing. The allowance is not available to self-employed workers.

HRA for the Self-Employed

Employed employees could also claim HRA. You can claim the benefits under 80GG, and this section can also be utilized to claim HRA tax exemptions by the salaried when they don’t get HRA. 

Special HRA Claims

1. Rent Payment to Family Members 

The individual seeking the tax exemption cannot own the rental premises. So, if you live with your parents and pay the rent, you can say HRA deduction. You, on the other hand, are unable to afford your spouse’s rent. Since you are expected to take the housing together in terms of your friendship. 

As a result, the Income-tax Department will scrutinize these transactions.

And if you are renting the house from your parents, make sure you have documentary evidence that your tenancy involves financial transfers between you and your parents. So keep track of your financial transactions and rent receipts because the tax department may deny your argument if the transactions’ validity is questioned. The Mumbai income tax appellate tribunal recently dismissed a salaried taxpayer’s HRA petition because the claim did not seem valid to the tax officials.

2. Own a House, but Staying in a Different City 

If your own home is leased out or you live in another place, you will take advantage of the simultaneous value of a discount for the home loan against ‘interest charged’ and ‘principal repayment’ as well as HRA.

How to Calculate HRA?

HRA is an essential part of a person’s compensation package. The cumulative amount allocated by the employer for the employee’s housing is referred to as rent. The sum set aside for HRA is useful to employees when it is used to measure tax deductions for a certain fiscal year. 

HRA will also help you save money by lowering your taxable taxes.

The tax incentives associated with HRA are only available to salaried people who live in rented housing. An employee who lives in his or her own home is not entitled to report the balance as a tax deduction.

HRA is calculated based on a variety of considerations, including the employee’s right to 50% of his or her minimum wage if he or she lives in a metro city and 40% if he or she lives in either of the other cities. 

The following three provisions are taken into account when calculating HRA for tax purposes:

• The real rent does not exceed 10% of the minimum wage.
• If you live in a metro, you will receive 50% of your minimum wage, and if you live in a non-metro area, you will receive 40%.
• The HRA number that the employer has allotted.

Example of HRA Calculation:

Consider the situation of Mr. Shiva, a salaried person who lives in Mumbai. He pays a monthly rent of Rs.10,000 for his leased accommodation. This equates to Rs.1.2 lakh per year. His monthly earnings as seen in the table below:

Per month, he has a PF of Rs.2,000 and a technical tax of Rs.200 deducted from his pay.

In Mr. Shiva’s case, the tax-free portion of his HRA will be the lowest of the following, based on his annual earnings:

Mr. Shiva will receive Rs.84,000 in tax exemption on HRA since it is the lowest value above. The remainder of his HRA will be taxed according to his income tax bracket.

Benefits of HRA

• The real rent you pay must be less than 10% of your monthly salary.
• The sum of HRA that your boss has given you.
• If you live in a metro, you’ll get 50% of your base income, and if you live anywhere, you’ll get 40%.

Eligibility

• It is only given to employees when an employee actually pays rent to the landlord. 
• Apart from the father, if the rent is typically paid by another family member HRA and its tax benefits are provided to that employee.

Required Documents for HRA Deduction

• Leasing certificates and rental agreements are the most important documents to include when requesting a tax deduction for HRA. 
• And if you pay rent to your parents, as a taxpayer, you will be liable for this deduction.
• To get a tax deduction on HRA, you’ll need to apply your rent receipts as a taxpayer. 
• In situations where the annual rent of the housing unit reaches Rs.1 lakh, the landlord’s/PAN landlady’s must also be given. 
• If the landlord/landlady does not have a PAN passport, he or she should have a self-declaration with the same information.