House Rent Allowance is one of the important components of salary. Particularly if you are living in a rented house and your salary income is taxable, House Rent Allowance can provide some tax relief for you. However, entire amount of HRA received cannot be claimed as deduction. Income Tax Act prescribes a specific formula through which amount of exempt HRA can be determine. In this article we shall focus on important rules related to claiming exemption for HRA and House Rent paid.
Section 10(13A):
The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. It must be kept in mind that entire amount of HRA is not an exempt income. It is an allowance and exemption can be claimed only if certain conditions are fulfilled.
Conditions for Claiming HRA Exemption:
- First and foremost condition for claiming HRA exemption is that the assessee must reside in a rented house. If the assessee resides in his own house or does not pay any rent for the house he resides in to, he shall not be eligible for any exemption in HRA.
- The amount of HRA received by the employee from his employer must be clearly stated in salary statement and Form 16.
How to Calculate amount of Exempt HRA?
According to section 10 (13A) of Income Tax Act, 1961 read with rule 2A of Income Tax Rules, House Rent Exemption will be least of following three:
1. Actual HRA received
2. Rent paid in excess of 10% of salary (Basic + DA) (Actual Rent Paid – 10% of Salary)
3. 40% of salary (50% if residing in a metro i.e., New Delhi, Kolkata, Chennai or Mumbai)
Let’s take an example.
| Basic Salary per month | 1,00,000 |
| House Rent Allowance | 55,000 |
| Rent Paid per month | 40,000 |
| City of Residence | Mumbai |
Exempt HRA shall be least of the following:
| Actual HRA Received per month | 55,000 |
| Rent above 10% of basic i.e. | 30,000 (40,000 – 10,000) |
| 50% of Basic | 50,000 |
| Exempt HRA | 30,000 |
HRA Calculation – Monthly or Annual?
There are four variables in HRA tax calculations: namely:
- Salary (i.e., basic pay plus DA)
- Actual HRA received
- Rent paid
- City of residence (whether metro or non-metro)
If all of above variables remain the same throughout the year, the HRA tax exemption calculation cab be done on ‘annual’ basis. However, if there is any change in the variables during any month of the year, HRA calculation must be done on monthly basis as exempt HRA for different months may be different.
Cases where location of residence and location of work are different?
For the purpose of HRA calculation, location of residence shall be considered as valid for determination of Metro or Non-Metro city. In such a case for the purpose of HRA calculation, place of residence will be considered and not place of working. Suppose that you’re working in a factory or a company located in Vapi (near Mumbai) while residing in Mumbai. So, for the purpose of HRA, your maximum entitlement for tax purpose will be 50% of the basic instead of 40% because for metros HRA tax entitlement is 50% and for non-metros it is 40%.
Can a self-employed person claim tax benefit for the rent paid?
A self-employed person does not receive salary. Hence, no tax benefit in respect of HRA can be claimed by such assessee. However, such person can claim exemption under section 80GG for rent paid by him.
What if the employer refuses to allow the HRA tax benefit?
In case if an employee residing in a rented house does not receive HRA as part of salary, he can claim tax exemption for the rent paid by him under section 80GG.
Can husband and wife both claim HRA tax benefit separately?
Both working spouses can claim exemption for HRA received by them subject to following conditions:
- Both spouses must receive HRA as a part of salary.
- They must reside in a rented house and must pay house rent jointly.
- Landlord must have issued either two separate rent receipts for both husband and wife or must have specified proportion in which both spouses have paid rent amount in a single receipt.
Payment of Rent to Spouse:
HRA Exemption cannot be availed for payment of rent to husband or wife. The legal relationship between husband and wife entails that they are supposed to live together and any rent paid to a spouse is not valid for claiming deduction from HRA or u/s 80GG.
Payment of Rent to Parents:
Tax benefit can be availed for payment of rent to parents. However, parents must show such rent amount as “Income from House Property” in ITR.
Required Evidence for claiming HRA Exemptions:
Following documents are required as evidence for claiming exemption from HRA in respect of rent paid.
- Rent Receipt issued by Landlord to the tenant.
- Form 16 issued by employer specifying amount of HRA received by employee.
Requirement to mention PAN of Landlord:
If rent paid for the year exceeds is Rs. 1 lacs . (Cir. No. 8/2013) PAN of landlord needs to be mentioned. However, if the landlord does not have a PAN, declaration must be taken from him for the same.
HRA benefits if no rent is paid:
Exemption from HRA can be claimed only if the assessee pays rent for the relevant FY for residential purpose. If no rent is paid by the assessee, he/she cannot claim deduction for HRA received by him.