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House Rent Allowance (HRA): HRA Exemptions & Tax Deductions

Updated on: 06 Feb, 2024 12:40 PM

HRA is a commonly used term in the realm of personal finance and employment benefits. It refers to an allowance provided by employers to their employees to help them meet their housing expenses. Understanding the intricacies of HRA is crucial for both employees and employers to maximize its benefits. Employees should familiarize themselves with the rules and regulations surrounding HRA tax exemptions and maintain proper documentation to support their claims.

There must be many questions in your head when we talk about HRA like Can I claim an HRA exemption? If yes, What basic conditions must be fulfilled to claim this benefit? How much HRA tax benefit can I claim? etc

Let us find out the answers to all such queries.

What is HRA (House Rent Allowance)?

In Income Tax, HRA is defined as a house rent allowance. It is the amount paid by the employer to the employees to help them meet living costs in rented accommodation. Most employers of both private and public sector/organizations pay HRA as one of the sub-components of salary to their employees.

The best part! Salaried individuals who live in a rented house can claim tax exemption on HRA under Section 10 (13A) of the Income-Tax Act. HRA is subject to full or partial tax deductions. An employee has to submit Form 12BB to the employer to claim the exemptions like HRA, LTA, etc., and Income Tax deductions under Chapter VI-A. It should be noted that self-employed individuals can also claim tax exemption for the rent paid under Section 80GG of the Income Tax Act.

Tax2win HRA calculator can be used to understand how much tax you could save on your HRA. Our tax calculator tool will help you to calculate what portion of the HRA you receive from your employer is exempt from tax and how much is taxable.


Eligibility Criteria to Claim Tax Deductions On HRA

You can claim HRA exemption for the period during which you stayed in a rented accommodation if the following conditions are fulfilled:

  1. 1. You should be a salaried employee. The tax benefits related to HRA are available only to salaried individuals. A self-employed person cannot take advantage of this exemption.
  2. 2. Receive HRA as a part of your salary package/CTC. The CTC or salary package includes basic salary, allowances, perquisites, etc. You must ensure that HRA is included in your CTC to take advantage of this exemption.
  3. 3. Live in rented accommodation. This exemption can only be claimed if you are staying in a rented accommodation, i.e., paying rent. No tax benefit is available if you reside in a self-owned house, as one cannot pay rent to oneself.
    You’re probably wondering…If you’re living in your parent’s house, can you claim this exemption by paying rent to your parents? The answer is yes. You can claim the exemption by paying rent to your parents. However, your parents need to show rental income received from you in their income tax return. Also, it is suggested that you pay the rent via Banking Transfer and execute the Rent agreement.
    Got further queries? Contact Tax2win for expert assistance.
  4. 4. Inform the employer about rent paid by submitting rent receipts. You must inform your employer about the rent paid and submit your rent receipts.
    • If annual rent exceeds Rs. 1,00,000 annually, then the landlord’s PAN is to be disclosed.
    Even if the declarations have not been made to the employer, you can still claim the HRA exemption while filing the income tax return.
  5. 5. Claim in return: Many times, it’s observed that companies do not give HRA exemption in Form 16 due to the unavailability of complete details.
    If your HRA claim has yet to be considered in Form 16, then you can directly claim the exemption in your IT return.
  6. 6. HRA exemption is allowed under the old regime only- The employee should opt for old regime to take the benefit of HRA exemption.
    Our experts are here to help you claim all the available tax exemptions and deductions & file your IT return hassle-free.
    House Rent Allowance(HRA)

How much HRA exemption is available under the income tax act?

HRA tax exemption depends on four components:

  • Salary (Basic salary + DA)
  • HRA component of the salary
  • Rent paid and
  • Location of your rental accommodation.

The exemption for HRA benefit is the minimum of:

  • The total amount of HRA received
  • 50 percent of salary (Basic salary + Dearness Allowance) if living in metro cities or 40 percent for non-metro cities
  • Excess of rent paid annually over 10% of annual salary (Basic salary + DA)

Experts’ advice to consider these points in the salary structure to avail maximum tax benefit. You can also use our free HRA calculator tool to compute the HRA exemption amount on your salary. The HRA tax exemption can be calculated either

  • Annually or
  • Monthly

The annual calculations can be done if all factors remain constant throughout a financial year. In case your salary structure or rent amount has changed, then the calculation needs to be done every month.


How is the HRA exemption calculated?

Example of HRA Calculation

Meet Mr.Modi, with a
Monthly basic salary of Rs 30,000
He receives HRA of Rs 14,000 and
Pays Rs 16,000 rent for an apartment
In a metro city

To avail HRA benefit, the least of the following amount (yearly) will be exempted for FY 2022-2023 (under the old tax regime), rest is taxable:

1 Actual HRA received 14,000 *12 Rs. 1,68,000
2 50%* of salary (Basic salary + DA) (metro city) 50% of Rs 3,60,000 Rs. 1,80,000
3 Excess of rent paid annually over 10% of annual salary (Basic salary + DA) Rs 1,92,000 – (10% of Rs 3,60,000) Rs 1,56,000

*50% because Mr modi lives in a metro city otherwise this would have been 40% only. In the above calculation, the sum of Rs 1,56,000, excess of rent paid annually over 10% of annual salary (Basic salary + DA), is the least among the above three indicators. Therefore, the amount exempted u/s 10(13A) shall be Rs. 1,56,000, and taxable income will be the balance amount of Rs 12,000 i.e., total HRA - exempted HRA (1,68,000-1,56,000).


Documents Required to Claim HRA Tax Exemption

Here are some common documents typically requested to support the claim for HRA tax exemption:

  1. Rent Receipts: Rent receipts are crucial documents that serve as evidence of your rental payments. They should include details such as the landlord's name, address, rental period, the amount paid, and the tenant's name. Rent receipts should be duly signed or stamped by the landlord and should be provided for each rental payment made during the financial year.
  2. Rent Agreement or Lease Deed: Providing a copy of your rental agreement or lease deed can further validate your tenancy. This document outlines the terms and conditions of your rental agreement, including the rent amount, duration, and other pertinent details. It serves as a legal proof of your tenancy and strengthens your HRA claim.
  3. PAN (Permanent Account Number) of Landlord: In some countries, such as India, providing the PAN of your landlord is mandatory for claiming HRA tax exemption. Ensure to request this information from your landlord and include it in your documentation.
  4. Declaration of HRA: Employers often require employees to submit a declaration form stating the amount of HRA received and the details of their rental expenses. This declaration helps employers calculate the eligible HRA exemption while deducting taxes from your salary.
  5. Utility Bills: While not always mandatory, providing utility bills such as electricity bills, water bills, or gas bills can further substantiate your claim by demonstrating your residence at the rented accommodation.

How to claim HRA exemption at the time of filing Income Tax Return (ITR)?

As you know, for claiming HRA, you must submit an income declaration form, i.e., Form 12BB, to your employer. You can download Form 12BB here.

But if you cannot furnish the required details in Form 12BB, then the last resort is claiming it while filing the ITR. Follow these basic steps to claim HRA exemption when filing ITR:

  1. Calculate the amount eligible for HRA exemption as explained above; you may also take the help of our free HRA calculator.
  2. Calculate your taxable salary by subtracting the exemptions and deductions from your gross salary.
  3. File your income tax return using the relevant ITR form.
  4. Fill in the HRA details in the tax return form. You need to enter the actual HRA received, the least of (a, b, c) as mentioned earlier, and the HRA exemption amount calculated.
  5. Attach the necessary documents, such as rent receipts, rent agreement, and Form 12BB.
    (Do note, you can download Rent Receipt via Tax2win that too Free.)

A Note of Caution: On providing fake rent receipts in the name of parents, spouse or other close relatives, you may fall into trouble. The Income Tax Department shall disallow fake HRA exemptions. So, be aware and claim only the correct amount only.

At Tax2win, claiming HRA exemption is easy, quick, and fast. Tax2win AI integrated portal selects the related ITR form automatically, and makes the process smooth for you.

In 5 simple steps, you can file an ITR and claim an HRA exemption.

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What to Do If We Do Not Receive HRA?

If you are living in a rented house and paying rent for it but do not receive any HRA from your employer, you can still claim deductions under Section 80GG. The conditions to claim deductions in this case are:-

  1. Self-employed or salaried: You should be either self-employed or salaried to be eligible for the deduction under Section 80GG.
  2. No HRA received: You should not have received any House Rent Allowance (HRA) during the year for which you are claiming the deduction under Section 80GG. This condition is important as HRA is already eligible for tax benefits, and this provision is meant for individuals who do not receive HRA.
  3. No ownership of residential accommodation: Neither you, your spouse, your minor child, nor the Hindu Undivided Family (HUF) of which you are a member should own any residential accommodation at the place where you currently reside, perform duties of office or employment, or carry on business or profession. This condition is to ensure that the deduction is available only to individuals who do not have a self-owned property at their current location.

Conclusion

A salaried employee must not miss an opportunity to claim an HRA tax exemption, as this is one of the best legal ways to save tax. Make sure to keep all authentic pieces of evidence. To be on the safer side, opt for a money transfer through a bank account as it is difficult to substantiate rental payments made in cash. The exemption amount is computed as per sec 10(13A) of the Income Tax Act. If you find it troublesome to calculate the exemption amount, use Tax2win’s accurate and free HRA calculator.

House Rent Allowance(HRA)

Frequently Asked Questions

Q- Can I claim the HRA exemption if I'm living with my parents?

Yes, You can apply for HRA exemption as the rent has to be paid to the owner of the property which means it can be your parents too. In that case, the rent you pay to your parents gets added to their taxable income. Make sure to keep banking transactions to prove that financial transactions regarding your tenancy took place between you and your parents. Further, rent receipts or rental agreement should also be kept as evidence.


Q- Where do I claim HRA in ITR 1?

For claiming HRA show it as an exempt allowance under section 10 while furnishing details of your salary income in ITR 1.


Q- Is a rent agreement required for claiming HRA exemption?

Rent receipts or rent agreements would be needed to prove your claim at the time of claiming the HRA deduction with your employer or if your monthly rent paid exceeds Rs 3,000.


Q- How can I get an HRA exemption?

You can claim HRA exemption by giving the proper disclosure to your employer and also claiming the same at the time of filing your income tax return for the year.


Q- Can I claim HRA if I also own a house?

There might arise two conditions under this

  • The rented and owned house is located in the same city

In this scenario, you have to justify some valid reason 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 fulfillment of applicable conditions.

  • The rented and owned house is located in different cities

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


Q- Can I Claim HRA and Deduction on Home Loan Interest as well?

Yes, subject to certain conditions, you can claim both HRA and interest on the home loan.


CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.