HRA – Everything You Need To Know

An employee’s salary consists of various components such as basic salary, dearness allowance, medical allowance, and various other benefits. Similarly, a house rent allowance (HRA) is a part of an employee’s salary. And, the employee has to pay on his/her salary income. 

However, HRA is not fully taxable. As per section 10(13A) of the Income-tax act, 1961, HRA is exempted to some extent and thus, helps in reducing your tax. 

What is HRA?

HRA is provided to the salaried employees who are living in rented accommodation. It is compensation provided by the employer to employees to meet the cost of a rented house in the city of the workplace. Therefore, the HRA helps employees towards the payment for accommodation every year. 

The primary benefit of house rent allowance is to reduce the taxable income of the employee and, consequently, reduction in tax liability. HRA benefits are available only for one house. 

Eligibility for availing HRA exemption:

• An individual should be a salaried person
• HRA is part of the salary structure
• A person should be living in a rented accommodation

How is HRA Calculated?

HRA is mainly based on the salary of the employees. However, other factors like employee living in metro city or non-metro city, actual rent, etc., are also considered. Therefore, the amount of HRA deduction is calculated as the least of the following:

1. Actual HRA received by the employer
2. 50% (employees living in the metro cities – Mumbai, Delhi, Chennai, Kolkata)/40% (for non-metro cities) of the salary
3. Actual rent paid less 10% of annual salary

Note: Here, salary shall include:

• Basic salary
• Dearness allowance (if forms part of retirement benefits)
• Commission based on the sales turnover

Can we claim HRA if we have not given rent details to the company?

An employee can claim HRA exemption only on the submission of rent receipts* or the rent agreement with the landlord. 

In addition, if the rent paid is more than Rs. 1,00,000 per annum, then it is mandatory to submit the PAN of the landlord to the employer. In case the landlord doesn’t have a PAN card, he/she can provide a self-declaration. 

Therefore, it is advisable to maintain the proper documents before claiming any exemptions under the income tax act. It serves as proof to show to the income tax department in case any scrutiny takes place. 

How to treat HRA in a new scheme?

The union budget 2020 introduced the new tax regime under the Income-tax act. Accordingly, the individuals have the option of whether to choose the old tax regime to the new tax regime. 

As per the new tax regime, an individual is not eligible to claim various exemptions, which also includes a house rent allowance. So, the tax benefit of HRA is allowed only by the individuals opting for the old tax regime.

Can we show rent which we are not paying?

For claiming HRA deduction, it is necessary that you must have rent receipts showing the amount of rent paid, landlord name, and property address. However, there could be special cases where you can show rent even if you are not paying to claim HRA benefits:

1. Paying rent to the family:

   To claim HRA, you must be living in the rented property. So, even if you stay with your parents and pay rent to them, you can claim an HRA deduction from the salary income. But, make sure to have the documentary evidence, i.e., rent receipts, showing the financial transactions are taking place. 

Note: If you pay rent to your spouse and try to claim HRA, then it is not permitted. However, if both husband and wife are paying house rent separately, both can claim the HRA exemption by furnishing the separate rent receipts. 

2. Having own residential house but staying in a different city:

   If you have your own house in one city and you work in another city, then also you can avail the benefit of HRA deduction.

Moving ahead, if you are not receiving HRA from your employer, then you can take advantage of section 80GG of the Income-tax Act, 1961.   

What is 80GG?

Section 80GG of the Income-tax act provides for the tax exemptions for making the payment of house rent. This, if you are paying rent for the residential property and not receiving HRA from your employer, then you have an option to claim deduction under section 80GG. 

Conditions to claim deduction under section 80GG:

1. Section 80GG deduction is available only for the individuals and HUF
2. You are a salaried employee or self-employed 
3. You have not received HRA exemption under section 10(13A) anytime during the financial year in which you want to claim 80 GG
4. You or your family (spouse, minor child) do not own any residential property in the city where you are currently working. 
5. Eligible individuals are required to furnish the self-declaration by filing Form 10-BA. 

Deduction under section 80GG:

The amount of deduction under section 80GG shall be least of the following:

1. Rs. 5000 per month
2. 25% of the adjusted total income 
3. Actual rent paid less 10% of adjusted total income. 

Conclusion

HRA is an amount paid by the employers to their employees as a part of the salary. The amount of HRA is computed as per prescribed criteria, and employees are also eligible to get exemption under section 10(13A) of the Income-tax Act, 1961. 

Besides that, if the employees don’t get HRA, then they can claim exemption of rent accommodation under section 80GG. However, you must have rent receipts for claiming HRA deductions and minimize your income tax liability in both cases.