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Calculating HRA from Basic Salary

Shyam has recently been offered a job at a multinational company. The problem is that Shyam lives in his own home in Kolkata, and the job requires him to move to Delhi. He is worried about the extra cost that renting a house is going to incur.

Shyam is then informed about HRA from his  research. He is relieved to have payment available in his salary for his rented accommodation. Here is what Shyam discovers about HRA through his research:

What is HRA?

House Rent Allowance or HRA, is a part of the salary a tax-paying individual receives from his/her employer to meet the cost of living in a rented accommodation. HRA is a useful and practical allocation of an individual’s salary component.

 HRA helps in managing the expenses of living in a rented house and helps in saving on total income tax.

 A salaried individual residing in a rented property can claim HRA exemption under section 10(13A) of the Income Tax Act, as per Rule 2A, to lower tax liability.

How is House Rent Allowance (HRA) Calculated?  

The House Rent Allowance (HRA) depends on the salary of an individual. According to income tax rules, the tax deduction that can be claimed on HRA is the minimum of the following amounts:

  • 50% of salary if the residential house is in Delhi, Mumbai, Chennai or Kolkata and 40% of salary if the residential house is in any other city. Salary here is the basic salary, dearness allowance (DA) and other commissions applicable for the purpose of HRA calculation.
  • Actual rent paid minus 10% of the basic salary.
  • Actual HRA received from the employer.

 

Let us consider an example :

 Mr. Ashok, who lives in a rented house, works as a salaried employee in Mumbai. He pays a monthly rent of Rs. 15,000 and receives a monthly HRA of Rs. 17,000. Now, let us understand how much tax deduction he can claim on the basis of this allowance. 

The Salary Component of Mr. Ashok are as follows:

Basic – Rs. 26,000

HRA – Rs. 17,000

Conveyance – Rs. 3,000

Medical Allowance – Rs. 1,250

Special Allowance – Rs. 2,300

Total – Rs. 48,550

 

The amount of HRA tax exemption will be the minimum of the following three categories:

Actual rent paid – 10% of the basic salary= Rs. 15,000 – (10% of Rs. 25,000) = Rs. 12,500;

 or

Actual HRA offered by the employer = Rs. 17,000;

 or

50% of the basic salary = 50% of Rs. 26,000 = Rs. 13,000.

Here, the actual rent paid – 10% of the basic salary is the minimum amount. Hence, Mr. Ashok will get  Rs. 12,500 tax exemption.

 

Eligibility Criteria to Claim Tax deduction on HRA

According to Section 10(13A) of Income Tax Act, the eligibility requirement for claiming tax deduction on HRA are as follows:

  • The person should be a salaried individual.
  • The person should receive HRA in their salary.
  • The person must live in a rented accommodation.
  • The person must be the one who is actually paying the house rent. The rent receipts must be issued in the person’s name.

 

Important Rules Regarding  HRA Deduction Claims

  • HRA claims cannot be made if an individual stays in their self-owned house.
  • If an individual is paying rent to their spouse, HRA deduction cannot be claimed on it.
  • If an individual owns a property in one city and is staying on rent in another city, the individual is still liable for a HRA deduction claim.
  • An individual can get HRA tax exemption as well as tax rebate on home loan, if that individual has rented a house for themselves even though they have their own home, for which they are paying a home loan through EMIs.The individual will need to prove that the self-owned house is far away from their workplace.

 

Proofs required for claiming HRA

According to the Income Tax Appellate Tribunal (ITAT)’s new rule the assessing officer can question the validation of a HRA claim. The assessing officer can demand the following proofs along with the rent receipts as proof to claim HRA:

  • Water bill.
  • Electricity bill.
  • Letter informing about the tenancy to the housing co-operative society.
  • Rent Agreement (Lease & license agreement) of current financial year and duly stamped on a notarized stamp paper.
  • Landlord’s PAN card if annual rent is greater than Rs.1 lakh.

 

Section 80GG – Alternative to HRA?

If you are a self-employed individual or a salaried individual who doesn’t get HRA, you can still receive tax exemptions under Section 80GG of the Income Tax Act. Section 80Gg is a special provision under Chapter VI A of the Income Tax Act, which provides tax reprieve to the individuals who don’t have HRA. To avail this provision for tax exemption the individual must be residing in a rented property. An individual can claim upto Rs. 60,000 under this section.

FAQs:

Can a salaried individual who lives in their parents' home, claim HRA?

Yes, an individual living in their parents' home can claim HRA, provided that they pay rent to the parents for the accomodation. If your salary includes a HRA, you can still get a tax exemption by having a rental agreement with your parents and transferring rent to them every month.

The necessary requirement for this tax exemption is - the parents must be the owners of the house and they must show the rent paid in the income tax returns.

What should I do if I forgot to submit the rent receipts to my employer?

HRA can be claimed directly on income tax returns. So, if you forget to submit rent receipts to the company at the time of proof submission, you can still claim HRA later when you file your IT return.

To claim these returns, you will need to include HRA in your taxable income and calculate the tax that is payable on the lowered taxable income. If tax has been deducted in excess you will be able to claim a refund.

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