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HRA Exemption In Income Tax

 HRA Exemption In Income Tax (2023 Guide)

HRA is an important factor in an individual’s salary breakdown. The House Rent Allowance (HRA) is a form of compensation provided by the organization pursuant to its policy. HRA is an allowance provided to employees above base salary if they move to another city and pay rent. HRA income tax exemption helps individuals save tax.

What is HRA?

HRA or House Rent Allowance is a portion of the salary payable to an employee by an employer to cover the cost of renting a house for residential purposes. It is an integral part of an individual’s payroll. HRA applies to both salaried employees and the self-employed. A salaried employee residing in a tenement can apply for exemption from her HRA under Section 10 (13A) of the Income Tax Act.

What are the eligibility criteria to claim a tax deduction on HRA?

Under Section 10 (13A) of the Income Tax Act, the housing rent is deductible from the HRA if the individual meets the following criteria:

  • The person applying for the HRA deduction is an employee or self-employed.
  • The individual must reside in a rented home. HRA tax calculations is not liable if you live in your own home.
  • You must be able to provide proof of rent paid. ie valid receipts for house rent.

In other words, if you don’t pay the rent, you can’t claim the HRA deduction, even if your employer paid HRA as part of your salary.

What is the maximum exemption for HRA?

The HRA tax exemption is the lowest of

i) Actual HRA received

ii) 50% of salary for metro cities, or 40% for non-metro cities; and

iii) Annual rent excess of 10% or more of annual salary

The metropolitan cities include Delhi, Mumbai, Calcutta, and Chennai.

How HRA tax exemption is calculated?

To understand HRA exemptions calculations, let’s look at a practical example.

Imagine you live in Mumbai. You earn a base salary of Rs 50,000 per month. The HRA component of salary is Rs 35,000, but the actual rent you pay is Rs 20,000. The amounts deducted under the above conditions are as follows:

Actual HRA received in the year: Rs 35000 X 12 = Rs 4,20,000

Actual rent paid (Rs 20,000 X 12 = Rs 1,80,000) – 10% of salary (Rs 60,000) = Rs 1,80,000

50% of basic salary [(Rs 50,000 X 12) X 50%] = Rs 3,00,000

In this example, Rs 1.80 lakh is the least amount among all the options. Therefore, you will get a Rs 1.80 lakh exemption from income tax.

How do I get a full HRA exemption?

The rules to apply for HRA claims are:

  • Allocated HRA cannot exceed 50% of basic salary.
  • As an employee, you are not liable to receive full rental payments. 
  • You can take advantage of HRA tax incentives in conjunction with a home loan.
  • If you live with your parents, you can pay them rent and receive a receipt for your HRA application. However, similar rules do not allow you to pay your spouse’s rent and apply for tax exemption.
  • If the annual rent of the property exceeds her Rs.1,00,000, it is mandatory to show the pan card of the landlord. Self-declaration can be submitted even if the landlord does not have a PAN card.
  • Another important rule is that if your landlord is a non-resident Indian (NRI), he must deduct 30% tax from the rent declared.

What documents are required to apply for HRA tax exemption?

HRA exemptions are only claimeable upon presentation of the rental receipt or rental agreement. Employees must report their ‘Landlord’ PAN to their employers to claim tax benefits if the rent paid exceeds INR 1,00,000 per annum.

Can I claim HRA for rent paid for parents in another city?

Yes, employees are eligible for HRA benefits if they pay rent to their parents, own a home in another city, or pay rent to another landlord in another city. In such cases, rent paid by the employee to parents or landlords in another city must be included as rental income while filing the Income Tax Return (ITR). Applications for assistance must be accompanied by a valid rental agreement as proof of payment. 

Frequently Asked Questions (FAQs)

How much HRA can I claim without a pan?

Yes, if your annual rent is less than INR 1,00,000, you can claim HRA without the PAN of a landlord.

How much HRA can I claim without receipts?

You can claim HRA without a rent receipt if HRA is up to Rs 3,000 per month.

Can I claim HRA if I own a house?

No. You cannot claim an HRA if you own and live at your house.

Is HRA calculated monthly?

HRA is calculated annually.

Can I claim HRA for two homes?

 No. The HRA benefits are available for only one house in the concerned city of the workplace. No. HRA benefits may only be redeemed for one house in the applicable location.

Can dual-income spouses claim the HRA tax benefits separately?

Yes. If both pay rent to the landlord and both can provide separate receipts.

Is HRA removed in budget 2023?

No changes have been announced to the calculation of the tax-exempt amount of the House Rent Allowance (HRA). 

Wrapping Up

Employees should not miss the opportunity to apply for an HRA tax exemption. Employees can also claim HRA benefits for home loan interest. 

The main benefit of the housing benefit is that it acts as a means of reducing taxable income, thereby reducing tax liability.

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