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The government offers salaried individuals many ways to reduce their tax burden. HRA is one, and it applies to all those who live on rent.
‘What do you spend most of your monthly salary on?’ Ask the average person this question, and he or she is likely to reply, ‘House rent’. Unless you own a house, the cost of having a roof over your head could be as low as Rs. 5,000 or as high as over Rs. 50,000. Of course, this would depend on the city you live in, the area, and the type of accommodation.
Understanding House Rent Allowance (HRA)
HRA is a part of the salary provided by employers to their employees. A salaried employee who receives HRA and lives in a rented accommodation, can claim exemption under Section 10(13A). On the other hand, self-employed professionals cannot avail the deduction. However, under certain conditions, HRA can be used for part exemptions.
Factors that determine HRA
Certain factors come into play when calculating HRA. These include-
• Your salary
• HRA provided by your employer
• Actual rent you pay
• Location of your rented residence (metro or non-metro city)
Are you eligible for HRA if you live with your parents?
If you get HRA allowance from your company but live with your parents, you are still eligible for this tax exemption. But, your parents must own the house you all live in, and you must present proof that you pay them rent. However, keep in mind that your parents must also present this rent as ‘income from other sources’ while filing their income tax returns.
Claiming deduction on HRA and home loans
If you have bought a property in one city and are repaying a home loan on it, yet live on rent in another city, you are eligible for claiming deductions on both, HRA and the home loan.
• Under section 80 C of the Income Tax Act, you can get tax deduction of up to Rs. 1.5 lakhs on the principal repaid on a home loan (with other investments and savings)
• Under section 24 B of the act, the maximum deduction of interest payable on home loans is up to Rs. 2 lakhs.
• Prior to FY 2017-18, the interest of a home loan on a rented house (in case of loss from house property) could be adjusted without limit from other incomes, under section 24. Now, however, this tax deduction limit has been restricted to Rs. 2 lakhs p.a., which means reduced tax savings.
What if your employer doesn’t provide HRA?
If you pay rent, but HRA is not a component of your salary, you can still claim exemption under Section 80GG. However, this becomes applicable under certain conditions:
• You have not received any HRA during the year for which you are making a claim
• You must be salaried or self employed
• You must be an HUF (Hindu United Family) or an individual
• You need to fill Form 10BA, where you declare that you are not claiming the Self-Occupied Property exemption on any house.
Under Section 80GG, the least of the following amounts is applicable for claiming
- Actual amount of HRA received
- 50% of basic salary for people living metro cities and 40% for non-metro
- Rent paid minus 10% of basic salary
How is HRA calculated?
Let’s understand this with an example. Ananth Kumar lives in Chennai and pays Rs. 15,000 as rent for his 2BHK apartment. Here is his payslip:
|Employee ID 7197
||Employee Name: Ananth Kumar
|Joining Date 07/07/2007
|Basic - Rs 35,000
|HRA - Rs 16,000
||PF - Rs 3,000
|CONVEYENCE - Rs 5,000
||PROFESSIONAL TAX - Rs 200
|MEDICAL - Rs 5,000
|SPECIAL ALLOWANCE - Rs 2,000
|TOTAL - Rs 63,000
Ananth’s basic salary: Rs. 35,000
HRA: Rs. 16,000
10% of annual basic salary: Rs. 35,000*12*10% = Rs. 42,000
To calculate Ananth’s tax exemption, the lowest amount of the three following conditions will be an applicable.
Annual HRA amount received: Rs. 16,000*12 = Rs. 192,000
Actual rent paid minus 10% of annual basic salary: (Rs. 15,000*12) – Rs. 42,000 = Rs.1,38,000
Ananth lives in a metro. Hence, 50% of his annual basic salary = Rs. 2,10,000
Therefore, Ananth’s tax exemption is Rs.1,38,000, as it is the least of the three.
Implications of false information
Individuals often furnish fake rent receipts to claim HRA. However, if you are caught submitting fake rent receipts, it will not only result in authorities rejecting your HRA claims, but could also attract other penalties. Section 10(13A) of the Income Tax Act states that one must rent an accommodation and live there during the time indicated in the submitted documents. The authorities will reject the HRA exemption if an individual owns the stated accommodation instead of renting it.
7th Pay Commission and how it affects HRA
Central government employees had demanded 30% HRA. But the Empowered Committee of Secretaries (E-CoS) rejected it. As of now, HRA remains 24% of the basic pay for Tier-1 cities, 16% for Tier-2 cities, and 8% for Tier-3 cities.
Government and Public-Sector Undertaking (PSU) employees enjoy Dearness Allowance (DA). It is essentially an adjustment towards their cost of living. E-CoS decided that if DA crosses 50%, the HRA rate will be revised to 27% of the basic salary for a Tier-1 city, 18% for a Tier-2 city, and 9% for a Tier-3 city. If DA crosses 100%, HRA will be further revised to 30%, 20%, and 10%, respectively.
The bottom line:
HRA is one of many allowances that can help you lower your tax burden. So, check with your HR manager and get your salary structured well. After all, why should you pay higher taxes than necessary?