HRA or House Rent Allowance: Deduction & Calculation
Allowances are benefits for employees included in their salary to meet their different necessities. HRA or house rent allowance is one of them to meet the rental requirements of living. Employees who need to stay away from their homes can avail of this benefit. This article will give you a complete idea of house rent allowance, tax deduction rules and its calculations.
What Is HRA or House Rent Allowance?
HRA, or house rent allowance, is the compensation amount paid by an employer to employees who live on rent near the workplace. This allowance is fully taxable; however, some tax deductions are allowed under 10 (13A) of the Income-Tax Act. Both private and public organisations pay HRA as a benefit to their employees. The components on which HRA deduction depends are
- Salary of the individual
- The total amount of HRA
- Amount of rent
- Place of employment
HRA Tax Calculation: Eligibility Criteria to Claim
HRA is not tax exempted; however, you can claim a tax deduction under 10(13A). The eligibility criteria are as follows:
- Must be a Salaried Employee.
The foremost criterion is that you must be a salaried employee to claim a tax deduction for HRA. Self-employed persons are not allowed to get any tax deduction for HRA.
- Should Live in a Rented Apartment
HRA only applies to those who pay rent. Therefore, employees who live in a self-owned place can not claim an HRA or a tax deduction. However, employees living with their parents can claim HRA and a tax deduction.
- HRA Should be a Part of CTC
Employees need to have their House Rent Allowance (HRA) included in their salary. Only then can they claim a tax deduction.
- Should Submit a Rent Receipt
Employees must submit the receipt of the paid rent as proof. Further, they also should submit the landlord’s PAN details if rent exceeds Rs. 1,00,000 per year.
Calculation of HRA Deduction: Formula with Example
The calculation of tax deduction depends on several components, such as your salary, amount of HRA, annual rent, the city you live in etc. The deduction or tax benefit for HRA is a minimum of:
- The amount of HRA
- 40% of DA plus basic salary for living in a non-metro city and 50% for metro cities
- A subtracted amount of 10% of the basic pay from the actual rent for accommodation
If you are wondering how to calculate house rent allowance, follow the below-mentioned example.
Consider Mr. Murthi
|He receives a monthly salary (basic pay) of Rs. 15,000|
|He receives HRA of Rs. 7000 per month|
|He lives in a metro city|
|He pays a rent of Rs. 8400 per month|
The calculation of his HRA will be:
- Actual annual HRA: Rs. 7000 X 12 = Rs. 84,000
- 50% of salary (basic salary + DA) for metro city
= 50% of (Rs. 15,000 X 12) = Rs. 90,000
- Actual rent paid for a year (Rs. 8400 x 12) – 10% of (basic salary X 12)
= Rs. 1,00,800 – Rs. 18,000 = Rs. 82,800
HRA deduction = The minimum of 1., 2., and 3.
= Rs. 82,800
Therefore, Rs. 82,800 will be exempted from his salary.
How is HRA Taxed in India?
HRA for salaried individuals and self-employed individuals fall under two different tax brackets. For example, in the above-mentioned calculation, Mr. Murthi is a salaried individual who pays tax for his HRA under section 10(13 A). Similarly, in case of Self-employed individuals and individuals who do not receive any HRA from employers can claim a deduction under 80GG of ITA.
What Are the Tax Benefits of HRA?
The benefits of tax deduction under 10(13 A) and 80GG are as follows:
- Individuals can even claim an HRA deduction if they live with their parents
- Employees can claim a tax deduction on HRA even while paying an EMI on a home loan, but the house should not be in the same city as the workplace
- HRA deduction decreases the amount of your taxable income.
Things to Consider While Claiming for HRA Deduction
The necessary points you should remember while claiming for an HRA deduction are as follows:
- HRA should be less than 50% of your basic salary
- Not the total amount of HRA is eligible for a tax deduction
- If the landlord is an NRI, individuals must deduct 30% tax from the rent amount
- In case living with your parents, you can claim a tax deduction HRA; however, for living with a spouse, it is not applicable
- Only Kolkata, Mumbai, Delhi and Chennai are metro cities, others are non-metro cities, and the tax deduction will be calculated accordingly.
We hope this article has given you a comprehensive idea about house rent allowance and other essential details. In addition, the article has also given a calculation of HRA deduction for your help. Besides, you can also get multiple benefits with HRA deduction.
Frequently Asked Questions
What documents are required to claim an HRA tax deduction?
To get an HRA tax deduction, individuals must submit the following documents:
The copy of the landlord’s PAN card if rent exceeds Rs. 1,00,000 per year
Proof of rent paid to parents or family members
How to claim HRA when living with your parents?
Individuals can claim a tax deduction on HRA if they live with their parents. Let’s understand this process with an example:
Suppose Sameer works in an MNC in Mumbai and gets HRA from his company though he lives with his parents. Hence, to get a deduction on his HRA, Sameer can enter into a rental agreement with his parents. Afterwards, he can show this proof while filing an ITR. Besides, Sameer’s parents should also report that he pays rent to them. In this way, Sameer can save the tax on his income.
What points to remember to claim a deduction under section 80GG?
Self-employed individuals can claim a deduction under section 80GG. The points to remember while claiming a deduction are as follows:
Individuals should not receive any HRA from employers
Individuals should fill out declaration form 10BA
Assessee should not own any residential property and must commute to workplace or business place from a rented apartment
The deduction will be the least of the following:
25% of adjusted total income
Rs. 5000 per month
Subtraction of 10% of adjustable total income from actual paid rent
Does HRA include maintenance charges?
No, maintenance charges are inclusive of HRA. This is because maintenance charges are the landlord’s earnings; therefore, they do not link to the employee’s salary. Therefore, employers do not need to pay maintenance charges in HRA.
Can an employee claim HRA after owning a house?
No, it does not apply to employees who live in self-owned accommodations. However, there can be two conditions:
Firstly, an employee can choose to live in a rented apartment after having their own house. This scenario can arrive due to the factor of distance. In this case, employees should present reasons for not residing at their apartment.
Secondly, if an employee’s house is in a distant city and the workplace is in a separate one, they need to stay in a rented apartment near the workplace.