HRA or House Rent Allowance is an allowance paid by the employer to the employees to meet the cost of a rented house taken by the employee. Income-tax law provides an exemption in respect of HRA if the employee is staying in a rented house.
In order to claim HRA exemption, an employee must have paid rent. In case an employee lives in his own house or he does not pay any rent, HRA exemption can’t be claimed. Tax benefit of HRA is only available to salaried individuals provided they pay rent. In case a salaried individual stay in his own house, nothing is deductible and the entire amount of HRA received is subject to tax.
What if rent is paid but HRA is not provided by the employer?
If an employee does not receive any HRA from the employer but he lives in a rented house then he can claim a deduction for the rent paid under Section 80GG.
How much HRA is exempt from tax?
The HRA amount received can be either fully or partially exempt from tax. However, if an employee doesn’t live in rented accommodation, but is still given this allowance then this allowance is fully taxable.
The exemption for HRA will be available up to a minimum of the following three amounts:
- HRA actually received from the employer
- Actual house rent paid minus 10% of salary
- 50% of salary (if the residence is in Delhi, Mumbai, Kolkata or Chennai), otherwise 40% of salary
‘The definition for Salary’ for the above calculation is different. For the above calculation, salary shall be total of basic salary, dearness allowance and commission paid to the employee.
The dearness allowance (popularly known as ‘DA’) is generally paid to mitigate the impact of inflation. It is calculated as a percentage of basic salary.
What if rented accommodation is only for part of the year?
In such a case, HRA exemption shall be allowed only for the period during which the rented house is occupied by the employee. For the remaining period for which there was no rented house, HRA amount received during such period shall be fully taxable. If rent paid is 10 per cent or less than 10 per cent of salary, the entire HRA amount shall be taxable.
Therefore, the amount of tax exemption for the HRA shall depend upon 4 factors – Salary, HRA, actual rent paid and place of residence (metro city or non-metro city). If these factors remain constant throughout the year, the exemption for HRA can be calculated for the year as a whole. Change in any of the factor, such as rent hike, salary hike or shift in residence etc., may cause a change in HRA tax exemption. Generally, it is unlikely that all 4 factors shall remain constant throughout the complete year. Increase in salary is a common reason for the change in HRA exemption.
How to claim the maximum exemption for HRA?
Employers generally fix HRA allowance as a fixed percentage of basic salary or sometimes employees have an option to decide the amount of HRA allowance to be received.
If an employee resides in a metro city
If an employee stay in metro city (Delhi, Mumbai, Kolkata or Chennai) and his employer pays HRA allowance at the rate of 50% of basic salary then entire HRA would be exempt from tax if employee pays rent which is 20% more than the amount of HRA for its rented house in the city of Delhi, Mumbai, Kolkata or Chennai.
If an employee resides in a non-metro city
If an employee stays in non-metro cities and employer pays HRA allowance at the rate of 40% of basic salary then
then your entire amount of HRA would be exempted from tax if the employee pays rent which is 25% more than the amount of HRA.
For instance, if an employee stays in Jaipur and basic salary is Rs. 25,000 and HRA is Rs. 10,000 (40% of Rs. 25,000). The entire amount of HRA shall be exempt if the rent paid every month is Rs. 12,500 [125% x 10,000] or more.
Frequently Asked Questions
Do I need to submit any documents for claiming HRA tax exemption?
When rent paid is more than Rs 3,000 per month
An employee paying rent for his accommodation shall submit the evidence for such payment (i.e., rent receipts) to his employer to get exemptions for the house rent allowance.
When rent paid is up to Rs 3,000 per month
However, salaried employees drawing house rent allowance up to Rs. 3,000 per month can choose not to submit the rent receipt. This concession is limited to the submission of evidence to the employer only.
When annual rent exceeds Rs. 100,000 p.a.
If annual rent paid by the employee to the landlord exceeds Rs. 100,000 per annum, it is mandatory for an employee to provide PAN of the landlord to the employer. In case the landlord does not have a PAN, a declaration from the landlord with his name and address should be filed by the employee.
Can HRA deduction be claimed when rent is paid to family members?
Yes, provided the recipient of rent shows it as an income of that family member and that family member declares it in his income tax return. If a house is in the name by a family member but an employee uses such house for his own residence, any rent paid to the family member shall be eligible to claim the benefit of HRA tax exemption. It should be noted that HRA deductions can be claimed if rent is actually paid to the family member.
To be noted that if the employee is paying rent to his family members, the Income-tax Assessing officer can ask to submit the evidence of actual payment made to the family members, i.e., bank statement, electricity bill, etc. The Assessing Officer can also ask the copy of the Income-tax return of a family member to check if they have shown such rent in their respective income tax return forms.
Can deduction for HRA and Interest on housing loan be claimed simultaneously?
One can claim HRA exemption as well as the deduction for interest paid on home loan if one owns a house but lives in another house on rent. Both the deductions are allowed only if one has a good reason for not living in the owned house. The reasons for this could be that workplace is in a different city, or that employee’s office is too far from the owned house or employee’s parents stay in his owned house. In case of income tax scrutiny, such scenarios may require sufficient explanations to by employer or by an employee to the income-tax authority.
As per the taxation laws, there is no provision in the Income-tax Act that restricts the claim of the tax deduction for either HRA or interest on housing loan. However, if tax exemptions of both benefits are claimed then such case should be genuine and tax evasion cases may not be able to hold ground during scrutiny.