Know how to maximise your HRA benefits and save tax on rent

Find out how you can save taxes on rent paid through HRA, even if HRA is not included in your salary structure.

Know how to maximise your HRA

House rent allowance (HRA) is an integral part of the salary package designed by employers. HRA exemption section offers significant tax benefits for the employee, depending on their pay package. Normally, HRA is included in the salary by employers to increase the tax savings of employees.

However, if it is not a part of your salary, you can still avail of some tax benefits if you live in a rented accommodation. Even if you live with family, you can still claim HRA exemption by following a few simple steps. But first, let’s see how HRA is calculated.

How is HRA calculated?

The maximum exemption that you can avail of under HRA is the minimum of the following,

  • Actual HRA received,
  • 50% of basic salary plus dearness allowance in case of metro residents (40% in case of non-metro residents), or,
  • Actual rent paid minus 10% of basic salary and dearness allowance.

In a simple metro-based salary structure of Basic – Rs 5 lakh, DA – Rs 2 lakh, HRA – Rs 3 lakh, and rent paid – Rs 3.6 lakh, the HRA tax exemption would be the lower of:

  • Actual HRA received – Rs 3 lakh
  • 50% of (basic salary plus dearness allowance) – Rs 3.5 lakh
  • Actual rent paid less 10% of basic salary and dearness allowance – Rs 2.9 lakh

As per HRA rules, exemption in this example is Rs 2.9 lakh.

As can be seen in the calculation, all three parameters can result in sizeable tax savings. There is no question of not availing of this tax benefit, except in two broad circumstances – if you don’t receive HRA from your employer in the first place, or if you don’t pay rent. However, even within these two scenarios, there is a possibility that you can still save taxes.

Related: How to claim HRA benefits while you work from home?

HRA not received

In case your salary structure doesn’t have an HRA component, you can claim a deduction for rent paid under section 80GG. You need to fulfil the following conditions to claim this deduction,

  • You must be self-employed or salaried,
  • You have not received HRA at any time during the year, and is not part of your salary structure,
  • Neither you nor your minor child, spouse, or HUF own a residential accommodation in the place of your employment or business,
  • You have to file Form 10BA with rent payment details.

The maximum deduction allowed under this section is the minimum of:

  • Actual rent minus 10% of his total income
  • Rs 5000 per month
  • 25% of adjusted total income

Total income, for this purpose, would be the total income before allowing this deduction.

High-income salaried taxpayers may note that 80GG deduction in the income tax returns is never likely to be more than Rs 60,000.

Not paying rent

You may not have to pay rent if you are living in your residence, or living with parents or relatives. Read on to find out how you can minimise your tax outgo through optimising HRA exemption by examining the example of a salaried employee.

If you are living in your self-occupied property, you are not eligible for HRA. You can also not claim this exemption if you live in rented accommodation but own a property in the same location.

However, if you stay in a house you don’t own (even jointly), you can claim HRA. This is applicable in the case of people living with their parents or relatives. If you are living with your parents or a family member, you can pay the rent to the legal owner/co-owner of the property in traceable mode, maintain rent receipts, and draft a formal rented house agreement.

Related: Home loan vs HRA: Which offers higher tax savings?

Saving tax by claiming HRA

You can save a lot of tax by opting for a salary structure with HRA, and ensuring that you claim the exemption. Let us look at two scenarios with and without HRA for an individual with the same total salary.

Salary component

With HRA (Rs)

Without HRA (Rs)

Basic salary

5,00,000

5,00,000

Dearness Allowance forming part of salary

2,00,000 2,00,000

Special Allowance

2,00,000 0

House Rent Allowance

0

2,00,000

Conveyance Reimbursement

1,00,000

1,00,000

Total Salary Income

10,00,000

10,00,000

Taxable Income

9,00,000

7,70,000

Taxable Income

96,200 69,160

A non-senior citizen male salaried individual with a taxable income of Rs 9 lakh can save around Rs 26,000 on taxes, i.e. around 3% of the total income. It is assumed that the taxpayer has an HRA of Rs 2 lakh in the second scenario, and no tax deducted investments, for the sake of simplicity. Besides, HRA and actual rent paid are assumed to be equal for HRA calculation.

Spreading the above salary structure percentage (basic – 50%, DA – 20%, Special Allowance/HRA – 20%, Conveyance reimbursement – 10%) for different lower and higher salary income, we find the following tax savings

Salary components  Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
Basic 250,000

1,000,000

2,000,000

8,000,000

16,000,000

DA

100,000

400,000 800,000 3,200,000 6,400,000

Special Allowance

100,000

400,000 800,000 3,200,000

6,400,000

Conveyance reimbursements

50,000

200,000

400,000 1,600,000 3,200,000

Total Income

500,000

2,000,000

4,000,000 16,000,000 32,000,000

Taxable Income

450,000 1,800,000 3,600,000 14,400,000 28,800,000

Tax thereon

- 366,600 928,200 4,942,470 10,988,250

With HRA benefit

Basic 250,000

1,000,000

2,000,000

8,000,000 16,000,000
DA

100,000

400,000 800,000 3,200,000 6,400,000
HRA 100,000 400,000 800,000 3,200,000 6,400,000

Conveyance reimbursement

50,000 200,000 400,000 1,600,000 3,200,000

Total Income

500,000 2,000,000 4,000,000 16,000,000 32,000,000

Taxable Income

385,000 1,540,000 3,080,000 12,320,000 24,640,000

Tax thereon

- 285,480 765,960 4,196,166 9,365,850

Tax Saved due to HRA

- 81,120 162,240 746,304 1,622,400
Tax saved/Total Income % - 4% 4% 5% 5%

That’s a tax saving of 3%-5% on almost any salary structure in financial year 2020-21. HRA benefits are automatically exercised in the case of most employees as their employers calculate their tax deductions. Other employees can explore this benefit by following the house rent formalities or section 80GG guidelines provided in the Income Tax Act. What you must know about HRA to ensure it is not rejected

Disclaimer: Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas. 

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