House Rent Allowance (HRA) is an important component of an individual’s salary package. It serves as a valuable benefit offered by employers to help cover a part of an employee’s residential rental expenses. In this article, we will explore the importance of HRA and the extent of deductions allowed under it.
What is HRA (House Rent Allowance)?
House Rent Allowance (HRA) is a component of your salary provided by your employer to help cover the cost of renting a home.
Is HRA Always Exempt?
Not all of the HRA you receive is automatically exempt from income tax. Since HRA is considered part of your salary, it is initially taxable. However, you may be eligible for a partial or full tax exemption under Section 10(13A) of the Income Tax Act, commonly referred to as the HRA exemption. If you own the property and do not live in rented accommodation, this allowance will be fully taxable.
Who Can Claim HRA Tax Benefits?
It is commonly believed that only salaried individuals can claim tax benefits related to HRA. However, any individual can take advantage of these benefits.
For Salaried Individuals Receiving HRA
Salaried employees who receive HRA can claim an exemption under Section 10(13A). The HRA received under this section is not considered part of the taxpayer’s salary.
For Other Individuals
Individuals who do not receive HRA or do not have a salary income can claim a deduction under Section 80GG. This deduction is subtracted from their gross total income.
The method of income computation for the Section 10(13A) exemption and the Section 80GG deduction differs slightly, with minor variations.
This article primarily focuses on the HRA exemption for salaried individuals.
Conditions for Claiming HRA Exemption under Section 10(13A)
To claim the HRA exemption, the following conditions must be met:
For Salaried Individuals Receiving HRA:
- The individual must live in rented accommodation.
- The individual must receive HRA as part of their CTC.
- Valid rent receipts and proof of rent payments must be submitted.
- The exemption amount will be calculated based on factors such as salary, rent paid, HRA received, and the city of residence.
For Other Individuals:
- The property where the taxpayer resides should not be owned by them, their spouse, or minor child. If owned by any of them, the exemption cannot be claimed.
- If the individual is a member of a Hindu Undivided Family (HUF), the property should not be owned by any other HUF member.
- The individual should not have received HRA during the financial year.
- This can include salaried individuals who did not receive HRA during the year or self-employed individuals.
How to Calculate HRA Exemption?
For salaried individuals receiving HRA, the lowest of the following amounts can be claimed as HRA exemption under section 10(13A):
- The actual HRA received
- 50% of [basic salary + DA] for individuals residing in metro cities (Delhi, Kolkata, Mumbai, or Chennai)
- 40% of [basic salary + DA] for individuals residing in non-metro cities
- The actual rent paid minus 10% of [basic salary + DA]
Let me know if you need further adjustments!
Illustration
Mr. Rajat, working in Mumbai, has rented a house for which he pays Rs.15,000 per month during the Financial Year (FY) 2024-25. His monthly earnings include a basic salary of Rs.25,000 and a dearness allowance (DA) of Rs.2,000, with DA forming part of the salary structure. In addition, he receives a House Rent Allowance (HRA) of Rs.1 lakh from his employer for the year.
Let us now determine the portion of HRA that will be exempt from income tax for FY 2024-25.
As per the rules, the amount of HRA exemption is the least of the following three:
- Actual HRA received: Rs.1,00,000
- 50% of salary (Basic + DA): Rs.1,62,000
(Calculation: 50% × (Rs.25,000 + Rs.2,000) × 12 months) - Rent paid minus 10% of salary: Rs.1,47,600
(Calculation: (Rs.15,000 × 12) – (10% × (Rs.25,000 + Rs.2,000) × 12))
Although Mr. Rajat pays a total rent of Rs.1,80,000 annually, the exemption is not based on the rent amount alone. It is determined through the above calculation, and the lowest value among the three computed figures will be the HRA amount exempt from income tax.
In this case, the entire HRA of Rs.1 lakh received from the employer is exempt from tax.
For Other Individuals
Under Section 80GG, the exemption is the lowest of the following three amounts:
- 25% of the total income (after claiming all other deductions, but before considering the deduction under Section 80GG)
- Rs.5,000 per month
- Rent paid minus 10% of the total income (after claiming all other deductions, but before considering the deduction under this section)
HRA Calculator
Use our free HRA Calculator to easily find out your eligible HRA exemption. The calculator helps you determine how much of your House Rent Allowance (HRA) is taxable and how much is exempt from income tax.
Documents Required to Claim HRA
To claim House Rent Allowance (HRA), the following documents are generally required. While you don’t need to submit all documents along with your income tax return, you must provide them to your employer for proof and keep them ready in case of any inquiry from the Income Tax Department.
- Rent Receipts
- Rental Agreement
- Form 12BB (statement of claims for deductions)
- Bank Statements or Online Payment Proof showing rent payments
- Salary Slip reflecting the HRA component
- PAN of the Landlord (mandatory if annual rent exceeds Rs.1 lakh; failure to provide may result in loss of HRA exemption)
- Self-declaration by Landlord (if the landlord does not have a PAN, a signed declaration is required, as per Circular No. 8/2013 dated 10 October 2013)
Can I Claim Both HRA and Home Loan Interest Deduction?
Yes, it is possible to claim both HRA exemption and deduction for home loan interest simultaneously.
This can happen in the following scenarios:
- If your rented house and owned property are located in the same city
You must justify why you are staying in a rented property instead of your own house. Valid reasons could include the long distance between your home and workplace, making daily travel impractical.
If proper reasons are documented and other conditions are satisfied, you can claim benefits under both sections.
How to Claim HRA When Living With Parents?
Let’s break it down with an example:
Samiksha works for an MNC in Bangalore. Although her employer provides her with HRA, she lives in her parents’ house instead of renting separate accommodation. So, how can she still make use of her HRA benefit?
Samiksha can pay rent to her parents and claim HRA exemption. To do this, she must sign a rental agreement with her parents and ensure that she transfers the rent amount to them every month, preferably through a bank transaction.
Additionally, her parents must report the rent received as income when filing their income tax returns. If their total income falls within the basic exemption limit or a lower tax bracket, this arrangement can help the family save on overall taxes.
Key Requirements for This Setup
- A valid rental agreement between Samiksha and her parents
- Regular transfer of the rent amount, ideally through a bank account
- Proper reporting of the rent received as income in the parents’ income tax return
Frequently Asked Questions (FAQs)
When can I claim tax exemption on House Rent Allowance (HRA)?
You can claim tax exemption on HRA only if:
- HRA is a component of your salary, and
- You are paying rent for your residential accommodation.
How can I claim an HRA exemption?
You can claim HRA exemption by:
- Submitting rent receipts and related proofs to your employer, or
- Claiming it directly while filing your income tax return (ITR).
I am a self-employed individual. Can I claim an HRA exemption?
No, self-employed individuals cannot claim HRA exemption.
However, you may be eligible for a deduction under Section 80GG for rent paid.
How to claim HRA in the Income Tax Return (ITR)?
When filing your ITR:
- Include the taxable portion of HRA under ‘Salary as per Section 17(1)’.
- Report the exempt portion under ‘Allowances to the extent exempt under Section 10’.
- Ensure HRA is appropriately reflected in salary components under Sections 17(1), 17(2), and 17(3).
How to claim HRA if it is not mentioned in Form 16?
If HRA is missing from your Form 16, it means your employer has not provided a separate HRA component.
In such cases, you cannot claim exemption under Section 10(13A) but may claim rent paid under Section 80GG if eligible.
What is an HRA certificate?
An HRA certificate is issued for government employees who could not avail of official accommodation. It serves as proof for claiming house rent allowance as per the prescribed procedure.
What happens if HRA proof is not submitted to the employer or HRA is not claimed in the ITR?
- If you missed submitting rent receipts to your employer, you can still claim HRA directly when filing your ITR.
- If you forgot to claim HRA in your filed ITR, you can submit a revised return before 31st December of the assessment year or before the assessment is completed, whichever is earlier.
Can I claim both Section 80GG and HRA?
No, you cannot claim both.
- If you receive HRA from your employer, you can claim HRA exemption under Section 10(13A).
- If you do not receive HRA, and neither you, your spouse, nor your minor children own a residential property in the city where you work or reside, you can claim a deduction under Section 80GG.
