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The tax benefit of House Rent Allowance (HRA) cannot be claimed as per the new tax rates introduced in Budget 2020 which will be applicable for FY 2020-21 (AY 2021-22).

What is HRA?

HRA means house rent allowance. It is the amount paid by the employer to the employees to help them meet the costs of living in a rented accommodation. Most of the employers of both private and public sector/organizations pay HRA as one of the sub-components of salary to their employees. The best part ! The salaried individuals who live in a rented house can claim tax exemption on HRA under Section 10 (13A) of the Income-Tax Act. 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 the self-employed individuals can also claim tax exemption for the rent paid under Section 80GG of the Income Tax Act.


Who can Claim HRA?

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

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. Receive HRA as a part of your salary package/CTC.

The CTC or salary package consists of various components like basic salary, allowances, perquisites, etc. To take advantage of this exemption, you must ensure that HRA is included in your CTC.

3. Live in rented accommodation.

This exemption can only be claimed if you are staying in a rented accommodation i.e. you are actually paying rent. No tax benefit is available if you are residing 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 for the same.

Got further queries? Contact Tax2win for expert assistance.

4. Inform the employer about rent paid by submitting rent receipts.

You have to inform your employer about the rent paid and submit your rent receipts.
• If annual rent exceeds Rs. 1,00,000 then landlord’s PAN is to be disclosed.

5. Claim in return

Many times, it’s observed that companies do not give HRA exemption in Form 16 due to unavailability of complete details.
The best part…?
If your HRA claim has not been considered in form 16, then you can directly claim the exemption in your IT return.
Our experts are here to help you claim all the available tax exemptions and deductions & file your IT return in a hassle-free manner. House Rent Allowance(HRA)


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

HRA tax exemption basically 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 on a monthly basis.


How is the HRA exemption calculated?

Let us consider an example,

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 2019-20 or FY 2020-21 (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 being excess of rent paid annually over 10% of annual salary (Basic salary + DA) comes out to be least amongst 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)


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

As you know, for claiming HRA, you have to submit an income declaration form i.e. Form 12BB to your employer. But in case, if you could not 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 at the time of filing ITR:

  1. Calculate the amount eligible for HRA exemption as explained above, you may also take help of our free HRA calculator.
  2. Subtract the calculated amount from your Gross salary income.
  3. Mention this income in the ITR

However, it is suggested to provide the required information timely in the income declaration form at the beginning of the year. This will save your time and money.

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 the correct amount only. The below image will help you have a quick look on the provisions of HRA : House Rent Allowance(HRA)


Conclusion

A salaried employee must not miss an opportunity to claim 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 a safer side, opt for money transfer through a bank account as it is difficult to substantiate rental payments made in cash.The amount of exemption is computed as per sec 10(13A) of Income Tax Act. If you find it troublesome to calculate the amount of exemption, then use Tax2win’s accurate and free HRA calculator.


Frequently Asked Questions

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

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 rent agreement required for claiming HRA exemption?

Rent receipts or rent agreement would be needed to prove your claim at the time of claiming 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 own 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 own house is located in different cities
In this scenario, you are eligible to claim tax benefit, if you had to shift to some other city due to job requirements.


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

HRA benefit is claimed on the rent paid and not on the home loan interest amount.


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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.