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What is House Rent Allowance: HRA Exemption, Tax Deduction, Rules & Regulations


 

What is House Rent Allowance: HRA Exemption, Tax Deduction, Rules & Regulations


 

In a salaried individual's compensation package, one crucial element is the House Rent Allowance (HRA). It's a significant benefit provided by employers to cover a portion of an employee's rental expenses for their residence. This article aims to explain the significance and extent of the deduction permissible for HRA.

What is HRA (House Rent Allowance)?

House Rent Allowance (HRA) is an allowance (part of CTC) given by your employer to help you cover the cost of living in a rented accommodation. 

Is HRA Taxable?

HRA is a part of your salary income and therefore, it is initially considered as your taxable income. However, if you live in a rented accommodation, you can claim a tax exemption either – partially or wholly under Section 10(13A) of the Income Tax Act. This is popularly known as HRA exemption. If you don’t live in a rented accommodation, this allowance is fully taxable.

Please note that the tax exemption of house rent allowance is not available in case you choose the new tax regime. 

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HRA for Self-Employed Individuals

Individuals who are self-employed cannot claim HRA but they can avail tax deductions towards the rented accommodation under Section 80GG.

HRA for Salaried Individuals 

Section 10(13A) of the Income Tax Act allows salaried individuals to claim exemptions for House Rent Allowance (HRA). As this allowance is a significant part of an individual's salary, it is important to follow the company's policies regarding the claiming of HRA. Rule 2A of the Income Tax Rules prescribes the quantum of exemption admissible.

How to Claim HRA Exemption?

To claim HRA exemption, you must meet the following conditions:

  • Live in rented accommodation.
  • Receive HRA as part of your CTC
  • Submit valid rent receipts and proof of rent payments.
  • The HRA exemption calculation will depend on various factors like salary, rent paid, HRA received by the employee and city of residence of employee.

How to Calculate HRA Exemption?

The lowest of the following amounts can be claimed as HRA exemption:

  • Actual HRA received 
  • 50% of [basic salary + DA] for those living in metro cities (Delhi, Kolkata, Mumbai or Chennai)
  • 40% of [basic salary + DA] for those living in non-metros
  • Actual rent paid (-) 10% of [basic salary + DA]

HRA Calculator

Try out our free HRA calculator to determine your HRA exemption. This calculator shows you on what part of your HRA you have to pay taxes – i.e. how much of your HRA is taxable and exempt from tax.

Can I Claim HRA and Deduction on Home Loan Interest?

Yes, you may claim both HRA exemption and home loan interest deduction.

There can be two situations where you are living in a rented house while owning a house. 

The rented house and the owned house are located in the same city

Here, you need to justify the claim of deduction with valid reasons, i.e., why you are not living in your own house. One case may be that the office location is very far from the house you own. This way, you can claim both HRA and Home loan benefits subject to the fulfilment of applicable conditions.

The rented and owned house is located in different cities

Here, you are eligible to claim tax benefits if you had to shift to another city due to job requirements.

When Do You Need a Landlord’s PAN?

If you have taken a house on rent and are making a payment of over Rs.1 lakh annually – remember to provide the landlord’s PAN. Else, you may lose out on the HRA exemption.

Landlords without a PAN must sign a self declaration stating he does not have a PAN, as per circular No. 8/2013 dated 10 October 2013.

Tenants paying rent to NRI landlords must remember to deduct TDS of 30% before making the payment towards rent. 

Click here to know more.

What If I Don’t Receive an HRA?

If you pay rent for living in a residential accommodation but do not receive an HRA from your employer, you can still claim the deduction under Section 80GG. Conditions that must be fulfilled to claim this deduction:

  1. You are self-employed or salaried
  2. You have not received HRA at any time during the year for which you are claiming 80GG 
  3. The expenditure incurred by you on rent of accommodation should exceed 10% of your total income
  4. You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation where you currently reside, perform duties of office or employment or carry on business or profession.

If you own any residential property other than the place mentioned above, you should not claim the benefit of that property as self-occupied. The other property would be deemed to be let out to claim the 80GG deduction.

 

Click here to know more on Section 80GG.

Illustration

Mr Anwar, employed in New Delhi, has taken up an accommodation on rent for which he pays Rs.15,000 per month during the Financial Year (FY) 2023-24. He receives a basic salary of Rs.25,000 monthly and DA of Rs.2,000, which forms a part of the salary. He also gets an HRA of Rs.1 lakh from his employer during the year.

Let us understand the HRA component that would be exempt from income tax during FY 2023-24. As per the given data, calculate the following:

HRA would be the lowest of the following:

  • HRA received – Rs.1 lakh
  • 50% of basic salary and DA – Rs.1,62,000 (50%*(Rs 25,000+Rs 2,000)*12 months)
  • Rent paid minus 10% of salary- Rs.1,47,600 

Therefore, the entire rent amount of Rs.1,80,000 paid by Mr Anwar is not directly exempt. It involves calculations, and the lowest of the three calculated amounts will be exempt from income tax.

Therefore, the entire HRA received from the employer is exempt from income tax.

How to Claim HRA When Living With Parents?

Let’s understand this with an example.

Samiksha works in an MNC in Bangalore. Though her company provides her with HRA, she lives with her parents in their house and not in rented accommodation. How can she make use of this allowance?

 

Samiksha can pay rent to her parents and claim the allowance provided. She has to enter into a rental agreement with her parents and transfer money to them every month. Also, Samiksha’s parents need to report the rent paid by their daughter as their income in their income tax return. They can save tax on the family income if their other income is below the basic exemption limit or taxable at a lower tax slab.

Things that are necessary in this arrangement

  • Rental agreement 
  • Transfer of rent amount, preferably via bank transfer
  • Reporting of rental income by their parents by filing an income tax return.

Click here to read more about claiming HRA when living with parents.

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How to Claim Deduction Under Section 80GG?

The least of the following will be exempted from tax:

  • Rs.5,000 per month;
  • 25% of adjusted total income*;
  • Actual rent should be less than 10% of adjusted total income*

*Adjusted total income is calculated as Gross total income after adjusting deducting all deductions except deduction under section 80GG.

Also read about:
Basic Salary
UAN Login
Last Date to File ITR 
Section 115BAC of Income Tax Act 
Income Tax Deductions List
How to e verify ITR 
Annual Information Statement (AIS)
Section 80D 
Home Loan Tax Benefit
Leave Travel Allowance

 

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Frequently Asked Questions

You can only claim tax exemption on HRA if the HRA component is part of your salary and paying rent for your residential accommodation.


 

You can claim HRA exemption by submitting proof of rent receipts to your employer. Alternatively, you can claim the HRA exemption yourself while filing your income tax return.


 

Effortlessly calculate your HRA exemption! 
Simply enter your annual basic salary, dearness allowance (DA), and HRA amount from your pay slip into this HRA calculator. It will instantly calculate and display your exempt HRA amount.

A self-employed individual cannot claim an HRA exemption. Only a salaried individual with an HRA component in their salary package can claim an HRA exemption. 

The employer deducts TDS at the applicable tax slab rates on balance HRA, which is not tax-exempt. 

Salaried employees who receive house rent allowance as a part of salary and pay rent, can claim HRA exemption to reduce their taxable salary wholly or partially.


 

House rent allowance received by an employee is partially or wholly exempt as per the conditions laid out in Section 10(13A).


 

Dearness allowance is a component of salary towards adjustment for living costs paid generally to government employees, public sector employees, and pensioners. Dearness allowance is calculated as a percentage of basic salary to cover the impact of inflation. 

HRA is a component of salary paid by big employers towards rent payment by the employee. HRA exemption is allowed least of the below :

  • Actual HRA received by the employee
  • 40% of salary for a non-metro city or 50% of salary if the rented property is in metro cities like Mumbai, New Delhi, Kolkata, and Chennai
  • Actual rent paid should be less than 10% of salary.

For the calculation above, the salary would include basic, dearness allowance (if provided in terms of employment), and a fixed percentage of commission.


 

The taxable portion of the HRA component should be included as a part of ‘Salary as per Section 17(1)’. 

An exempt portion of the HRA component is to be added under the heading ‘allowances to the extent exempt u/s 10’ (ensure that it is included in salary income u/s 17 (1), 17(2), 17 (3)). 
Please note that if you file ITR online through Cleartax, the software auto-populates the Form 16 component. In such a case, you will just have to verify the amount auto-populated. 

If HRA is not mentioned in Form 16, that means your employer has not provided a separate component of HRA. HRA u/s 10(13A) can be claimed when the employer gives a separate component towards HRA. In the absence of it, you can claim for rent paid under Section 80GG.


 

HRA can be at most claimed as according to the lowest of these three amounts 

  1. Actual house rent allowance received 
  2. 40% (in non-metro city) or 50% (in metro city) of the salary 
  3. Actual rent paid less than 10% of the salary.

Please note that you can claim HRA if you reside at your parents’ house, provided that you transfer the rent to your parents. In this case, your parents will have to report this rental income in their return of income for taxability purposes.  

If your parents have income less than the basic exemption, they are not liable to pay taxes. 

Further, the benefit of HRA can also be claimed if you own a house and are claiming a deduction for principal payment u/s 80C and interest deduction u/s 24. The reason for residing in a rented house should be genuine and valid. The IT department can closely monitor this arrangement.


 

An HRA certificate is a certificate issued by the government employee for claiming house rent allowance for not being able to avail of a government accommodation according to the prescribed procedure. 


 

Documents like rent receipts and rental agreements must be submitted to the employer to claim a house rent allowance deduction. If the payment of rent is more than Rs 1 lakh per annum, then the PAN of the landlord must be submitted. Based on these proofs, employers will provide exemption for HRA in Form 16.


 

While filing returns through Cleartax, you can directly upload Form 16. The details mentioned in Form 16 will auto-populate, including the HRA exemption. However, suppose you don’t have Form 16. In that case, you can add the exempt portion of HRA under the tab Income sources > point 2 exempt allowances under Section 10.

Use HRA exemption calculator of Cleartax.


 

It is mandatory to submit rent receipts or a copy of the rental agreement as proof for claiming a house rent allowance deduction.


 

If you missed submitting rent receipts or a copy of the rental agreement to your employer at the time of proof submission, you can claim the HRA deduction while filing ITR.

In case you miss claiming the HRA while filing your return, you can file a revised return to correct the error before 31st December of the assessment year or completion of assessment, whichever is earlier.


 

According to Section 10(13A), an employee can claim an HRA deduction maximum up to the actual HRA component received from the employer.


 

No, Individuals paying rent but not receiving house rent allowance can claim a deduction under Section 80GG. Also, the individual, spouse or children should not own a house property in the place of employment, business or location where the individual ordinarily resides for claiming this deduction