HRA is a vital part of your salary that goes beyond your basic pay and is designed specifically to help you with the burden of house rent when you move to a new place. According to the Income Tax Act, HRA can help you save on taxes, contributing to your overall financial savings. In this article, we will explore the meaning of HRA and explain how HRA is calculated so you can better understand its role in better managing your finances.

Table of Contents

• What Is HRA (House Rent Allowance)?
• How Is House Rent Allowance Determined?
• How House Rent Allowance Is Calculated
• HRA Tax Deductions
• Things To Consider When Making HRA Deductions
• Benefits of HRA
• Who Can Avail of HRA?
• Required Documents for HRA Deduction
• Eligibility Criteria To Claim Tax Deduction on HRA
• How To Claim Deduction Under Section 80GG
• Documents Required To File and Claim HRA Tax Exemptions
• Conclusion
• FAQs

HRA Meaning (House Rent Allowance)?

Employers offer a House Rent Allowance, or HRA, to help with rent if you are living in a rented space as per Section 10 (13 A). You can claim HRA if you are a salaried or self-employed individual living in a rented space and submit rent receipts to your employer. If you own your home, you are not eligible for HRA. The exempt HRA is calculated and deducted from your taxable salary, which you can find in Form 16. It is important to know that HRA deductions only apply to the old income tax regime, not the new one.

How is House Rent Allowance Determined?

Now that we know what HRA is, let's understand how it is determined. The determination of the House Rent Allowance varies based on your city of residence. If you are in a metropolitan area, you are entitled to HRA equivalent to 50% of your basic salary. However, in other cities, this number drops to 40%.

If your basic pay doesn't include Dearness Allowance or commissions, a good rule of thumb is for your HRA to be around 40% to 50% of your basic pay. This insight helps you grasp the dynamic nature of HRA calculations based on your location and salary components.

How House Rent Allowance Is Calculated

Managing monthly expenses is a critical aspect of financial planning, and HRA plays a vital role in it. Accurately calculating HRA is essential to effectively allocating salary for other monthly expenditures. Luckily, with the advent of online HRA calculators, determining potential HRA rebates has become much more straightforward. To understand how house rent allowance is calculated in a bit more detail, let's take a look at the following factors:-

Actual HRA Received

This is the specific amount of House Rent Allowance (HRA) that the employee receives from their employer as a part of their salary package to help them cover their rental expenses. This allowance is determined by the company's policy and the employee's job position.

Rent Paid

This refers to the amount of money an employee pays for their housing, including basic rent and additional charges like maintenance. However, it does not include the cost of utilities like electricity, water, or other facilities.

Salary

An employee's salary typically consists of a few different parts. There's the basic salary, which is the amount they're guaranteed to receive. Then there's the dearness allowance, which is an additional amount that may be added to their salary (depending on the company's policies and the cost of living in the area). Finally, there may be other fixed pay components that are included in the total salary.

Location of Residence

The exemption limit for House Rent Allowance (HRA) is dependent on the city or town where the employee resides in rented accommodation. This limit varies based on the category of the city or town, with different categories having different exemption limits. It is important for employees to be aware of the applicable HRA exemption limit for their city of residence in order to accurately calculate their taxable income.

HRA Exemption = (Actual HRA received) OR (Rent paid - 10% of salary)

Let us understand how HRA is calculated step-by-step with the example of Mr. Raj Sharma, a salaried individual residing in Delhi. Raj lives in a rented flat, paying INR 10,000 monthly, totalling INR 1,20,000 annually. A professional tax of INR 200 and a Provident Fund of INR 2,000 are deducted from his monthly salary. Here's a breakdown of his monthly earnings and the calculation of HRA:

Calculation:
Actual rent paid annually minus 10% of basic salary:
(INR 10,000 x 12) - INR 36,000 = INR 84,000

Actual HRA given by the employer annually:
INR 13,000 x 12 = INR 1,56,000

50% of basic salary (annually):
INR 1,80,000

One can claim tax exemption on HRA deduction, which is the smallest of the three and amounts to INR 84,000.

HRA Tax Deductions

Tax deductions are available for the rent amount you pay. This applies to both people who have a job and those who are self-employed. However, if your job offers you a house rent allowance and you do not pay rent, that allowance will be considered part of your taxable income.

To make the most of your tax benefits, merely understanding the meaning of house rent allowance will not suffice. It’s also important for you to know how it can affect your taxable income.

Let’s understand how HRA deduction works for both salaried and self-employed individuals.

1. HRA for Salaried Employees

Salaried individuals can avail of HRA exemption under Section 10(13A) of the IT Act, allowing a reduction in their taxable salary. This provision proves valuable in optimizing tax liabilities for salaried employees.

2. HRA for Self-Employed

Self-employed individuals can benefit from HRA exemptions when filing their income tax returns. The exemption is available under Section 80GG of the Income Tax Act. However, it's important to note that the exemption cannot be availed under Section 10(13A) of the same Act.

Things to Consider When Making HRA Deductions

When claiming HRA deductions, consider the following points:

• HRA Exemption: HRA is partially exempt; the exemption is the least of actual HRA received, 40-50% of basic salary (depending on the city), or actual rent paid minus 10% of basic salary.
• Required Documentation: Submit rent receipts, landlord details, and PAN if rent exceeds INR 1 lakh annually. Form 60 is required if the landlord lacks a PAN. Rent receipts over INR 5,000/month need a revenue stamp.
• HRA and Home Loan: HRA and home loan benefits can be claimed together if conditions are met. HRA applies only to rent paid for residential premises not owned by the taxpayer.
• High Rent Payments: Rent over INR 50,000/month requires 5% TDS under Section 194IB.
• Avoid False Claims: False HRA claims can lead to tax scrutiny and investigations.

*Please note that HRA exemptions are not applicable under the new tax regime. You can claim the exemptions only if you choose to file a return under the old tax regime and receive HRA.

Benefits of HRA

You should understand the benefits of the House Rent Allowance (HRA) for maximising your financial gains. Here's why HRA is advantageous:

• Cost Threshold: Your actual rent should ideally be less than 10% of your monthly salary for HRA benefits.
• Employer's Contribution: The HRA amount provided by your employer directly contributes to potential tax exemptions.
• Location Advantage: HRA offers flexibility based on your location, with metro cities offering 50% of your base income and other locations offering 40%. It's a valuable tool for managing your finances efficiently.

Who Can Avail of HRA?

Salaried individuals can claim House Rent Allowance (HRA) if they:

• receive it as part of their salary package and
• reside in rented accommodation.

This benefit is not limited to a specific sector, as both private and public sector employees with HRA in their salary structure can claim it.

If you pay rent but don't receive HRA, you can still claim a deduction under Section 80GG if certain conditions are met. To claim the exemption, valid rent receipts are necessary. If the annual rent exceeds INR 1 lakh, the landlord’s PAN must also be provided.

Required Documents for HRA Deduction

When aiming for a House Rent Allowance (HRA) deduction, ensure you have the following documents:

• Leasing Certificates and Rental Agreements: Crucial for validating your rental expenses.
• Rent Receipts: As a taxpayer, submitting these receipts is essential to claiming an HRA deduction.
• Rent Payments to Parents: If you're paying rent to your parents, you can still avail of the deduction, emphasizing transparency in financial transactions.
• Landlord's PAN Details: For housing units with an annual rent exceeding INR 1 lakh, providing the landlord's or landlady's PAN details is mandatory.
• Self-Declaration: If the landlord lacks a PAN, a self-declaration with relevant information becomes necessary for a smooth HRA deduction process.

Eligibility Criteria to Claim Tax Deduction on HRA

To successfully claim tax deductions on House Rent Allowance (HRA), individuals must meet specific eligibility criteria:

• Salaried or Self-Employed: Those eligible for HRA deductions include salaried employees and self-employed individuals.
• Submission of Proof: Taxpayers must provide evidence such as house documents or rent receipts to substantiate their HRA deduction claims.
• Residing in Rental Properties: Only individuals living in rented accommodations can claim HRA exemptions, emphasizing the necessity of a genuine landlord-tenant relationship for tax benefits.

How to Claim Deduction Under Section 80GG?

In HRA deductions, you can claim the least of the following:

• 25% of gross total income
• The rent paid – 10% of the gross total income
• INR 5,000 per month or  INR 60,000 per annum

To claim deductions under Section 80GG, you should know these key points:

• Eligibility: This applies to self-employed, salaried individuals and HUF members not receiving HRA.
• Choosing Sections: Opt for either Section 10(13A) or Section 80GG for HRA deductions, but not both.
• Maximum Deduction: The maximum deductible amount is INR 60,000.
• Ownership Criteria: Ensure neither you nor your family own property at your residence.
• Exemption Limit: You cannot seek tax benefits for owned properties elsewhere.
• Form Submission: File Form 10-BA, a self-declaration affirming compliance with HRA deduction rules.

Documents Required to File and Claim HRA Tax Exemptions

Ensuring a smooth process for HRA tax exemptions involves providing the following documents:

• PAN Details: For annual rents exceeding INR 1,00,000, furnish your PAN details and your landlord's PAN card photocopy.
• House Rent Receipts: Essential receipts should detail
• the tenant’s name,
• date of payment,
• landlord's name,
• rented address,
• revenue stamp with the landlord's signature, and
• duration of stay.
• Rental Agreement Copies: If applicable, submit photocopies of your rental agreement.
• Recent Rental Receipts: Include rental receipts for the preceding four months.

These documents contain all the necessary details and information that support your HRA claims and help you get tax exemption without any trouble.

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Conclusion

In conclusion, House Rent Allowance (HRA) is crucial to your salary, especially if you are relocating for work. Understanding HRA's calculations and exemptions is essential for optimizing your financial planning. Whether you're a salaried individual or self-employed, knowing the rules and required documents ensures smooth HRA claims. If you're considering buying a new home, explore home loans from SMFG Grihashakti. With loan amounts up to INR 1 crore*, competitive interest rates, and flexible tenures of up to 30 years*, you can make your homeownership dreams a reality. Apply now!