Are you a salaried person?
Have you ever looked at your salary slip and wondered about the exact purpose of house rent allowance (HRA)? Do you know that HRA can help reduce your taxes if you stay in a rented accomodation?
Or may be you have some questions on your exemption limits or exact taxation rules that govern the HRA calculations.
Let’s see if I can help you with this…
I will cover basics, exact taxation rules applicable to HRA as well as common questions that typically arise when one is dealing with house rent allowanace.
What is HRA
First things first, what exactly is HRA?
At its most basic, HRA is essentially a rent allowance. Employers primarily pay this allowance for employees to take care of their residential accommodation expenses at place of work.
How much HRA you get, is typically calculated as a percentage of your overall salary. In most cases this percentage stays constant, but in some companies the percentage may vary by the city.
So if you are working in a metro with higher rents, you may be getting more than your counterparts in smaller cities with lower rents. Further, some companies allow flexible CTC packages where you can choose your own HRA percentage.
The best thing about HRA is that you can use it to save taxes as it is eligible for tax deductions…
How, you ask? How much, you ask? Am I eligible, you ask?
Key HRA Rules
HRA is governed by section 10(13A) of Income Tax Act, 1961.
The very first rule of that act is that HRA is only applicable to salaried persons. If you are a self employed professional or a businessman, you can’t claim the HRA exemptions (however you can deduct house rent under section 80GG).
Second, HRA exemption is only available if the employee actually stays in a rented accommodation. The period of stay should overlap with the period for which the exemption is sought out for.
So if you are staying in your home, you are not eligible to claim the HRA even if you are getting it as part of your salary. From taxation perspective, it will be treated like just any other part of your salary.
Third, even if you are not staying in your own accommodation but are not paying rent (e.g. if you are staying with your parents or relatives without paying rent to them), you are not eligible for this exemption. You should incur an actual rent expenditure for you to be eligible.
Fourth, if your rent exceeds 1 lakh INR during the financial year, you will have to furnish the name, address and pan (permanent account number) of the landlord. Some companies will ask for rental agreements as well as a proof.
In case the rent paid out is less than 1 lakh INR for the financial year (less than 8333 INR per month), you won’t need to specify landlord’s pan details.
How to calculate HRA
As per HRA laws under section 10(13A) of income tax act, the exemption amount will be the least of the following:
- The actual HRA received from the employer
- Rent paid minus 10% of the salary
- 50% of basic salary (in metro cities of Delhi, Kolkata, Chennai, Mumbai) or 40% of basic salary (in all other non-metro cities)
Basic salary here is defined as basic pay plus dearness allowance or commissions if any
HRA is computed on a monthly basis.
If you change your jobs in mid-year or get a salary hike during the middle of the year or your rent changes during the year or the city you are staying in change during the year, the HRA exemption you are eligible for will change too.
Let’s look at one example to understand this better.
David works in Delhi and gets a basic salary of 50000 INR per month, dearness allowance of 20000 INR per month and HRA of 20000 per month. David pays an actual rent of 20000 per month.
In David’s case, the HRA will be the least of following:
- 20000*12 months = 2.4 lakhs
- 20000*12 months – 10% of (50000*12 months+20000*12 months) = 1.56 lakhs
- 50% of (50000*12 months+20000*12 months) = 4.2 lakhs
So essentially David is actually eligible for 1.56 lakhs of HRA exemption for the financial year, even if he received 2.4 lakhs of same. Rest of HRA amount will be taxed according to the tax slab David is in.
Let’s take another example.
Smith works in Bangalore and gets a basic of 50000 INR per month. He gets an HRA amount of 12000 per month and gets no dearness allowance or commissions. Smith stays in Bangalore and pays 10000 INR per month as rent.
Smith will have minimum of following as his HRA
- 12000*12 months = 1.44 lakhs
- 10000*12 months – 50000*12 months*10% = 0.6 lakhs
- 40% of (50000*12 months) = 2.4 lakhs
Smith will get 60,000 as HRA exemption even though he is getting 1.44 lakhs in HRA in his salary slip. You may note that we have used 40% in this case instead of 50% as city of residence has changed from Delhi (metro) to Bangalore (non-metro).
Some Queries on house rent allowance
My friends have asked me many questions over the years on exact HRA rules. A lot of them are repetitive, so I will put some of common ones here
What are documents or proofs that are needed for claiming HRA benefit?
You will need rent receipts and rental agreements to claim the HRA exemption. However, one exception to you not needing rent receipt is if you are paying a rent of less than 3000 per month.
Also, starting June 2016, you will have to submit the form 12BB at the end of the financial year to claim any exemption. Fret not, Form-12BB is simply a claim statement you will anyway submit as part of investment proof declaration at the end of the financial year.
Can I pay rent to my parents and claim the HRA exemption?
You may claim the HRA exemption in case you satisfy the following conditions:
- Your parents should own the property i.e. the house has to be registered in their name
- You actually pay the rent to them every month and have proofs for same e.g. rent receipts, bank transfer statements, etc
- Your parents should specify the rent received from you as part of their declared income
Can I pay rent to my siblings or relatives and claim the HRA exemption?
Same rules as those in the case of paying rent to parents apply. Your siblings or relatives should own the property, you should actually be paying the rents and they should declare rent received from you as part of their income declaration
Can I pay rent to my wife/husband and claim HRA?
No, it’s not allowed under Indian taxation laws. You can’t pay rent to your wife or husband and claim HRA even if they own the property and declare the rent as part of their income.
Can I get HRA exemption and home loan benefits at the same time?
Yes and No…
It depends upon your exact situation.
If you are staying in the house you want to claim the home loan benefits for, you will not be eligible for any HRA exemptions.
If you stay in a rented apartment but have a residential property that you own in a different city, you may claim both home loan and HRA benefits.
If you stay in a rented apartment but have a residential property that you own in the same city that’s eligible for a home loan benefit, you may claim both HRA and home loan exemptions. Please note that you may be asked by your assessing officer to justify why you are staying in a rented apartment even when you have a home in the same city.
How to claim HRA exemption if I share the apartment with friends and flatmates?
It’s possible. Even if you are sharing the apartment between multiple friends, you can claim the HRA.
You should in such cases only declare your portion of the rent and ideally should get a rent receipt to support that. Duplicates of overall rent receipt work too.
Rest of the process is exactly same. In case your portion is more than 1 lakh per financial year, you will have to declare the landlord details and may need a rental agreement copy too.
I changed jobs in the middle of the year, how to claim the HRA?
If you had two different employers during the same financial year, you will have to do two HRA calculations, one for each employer. You will take into account the number of months you worked for them into account while calculating same.
Let’s take an example…
David is working in company X where he is getting an HRA of 20000 per month. But in the first quarter of the financial year, he gets a great offer from company Y which significantly increases his package.
He joins Company Y in August and his HRA increases to 30000 per month. Essentially David spent the first 4 months of the financial year at company X while the last 8 months were spent at company Y
The total HRA for David during this specific financial year will be 4 months *20000 + 8 months * 30000
The other calculations on basic pay, dearness allowance, etc will be applicable similarly. Please note that HRA is calculated on a monthly basis, so you may not get benefit of any ‘rest month’ you take in-between jobs.
I missed providing rent proofs to my company? Can I still claim HRA exemption?
Normally, if you do everything right, your company will specify HRA exemption details in the form16 that will be issued to you at the end of the year.
However, if you don’t declare the rents or don’t provide the appropriate proofs, you may not get the benefits. In such cases, you can expect your employer to deduct extra tax from your year end salary.
All is not lost as you will still be able to claim the HRA exemption while filing the income tax return. If you have paid extra tax due to this, a refund for same will be issued to you.
My general recommendation is to not miss providing the proofs to your employer. While it’s possible to get the taxes back, it’s an unnecessary hassle and something you can avoid
Any other question on HRA? Just let me know in the comments and I will try answering it.