What you must know about HRA to ensure it is not rejected

HRA is a popular way for salaried individuals to save on taxes. But there are certain dos and don’ts you must ensure to prevent your HRA exemption from being rejected

What you must know about HRA to ensure it is not rejected

Most salaried professionals are entitled to get House Rent Allowance (HRA) as a part of their Cost to Company (CTC). HRA offers a good opportunity to save tax for those who live in rented accommodation. Under Section 10(13A) of the Income Tax Act, these individuals can claim HRA exemption when filing for income tax, thus helping them to lower their total taxable amount. 

Calculation of HRA exemption

Four important factors are taken into consideration when calculating HRA as a tax exemption. These include: 

  • Salary of the individual
  • The component of HRA from the annual salary
  • Rent the individual is paying
  • Individual’s location (metro or non-metro, which tier city). 

HRA allowance is taken as the minimum of any of the following three components, depending on the individual’s salary structure:

  • Amount received as HRA from the employer
  • Actual rent amount minus 10% of the basic salary (including Dearness Allowance and other commissions)
  • 50% of the basic salary if staying in a metro city and 40% in a non-metro city.

Related: HRA: Everything you need to know about it

HRA calculation: 

For instance, let us suppose your basic salary is Rs. 2,40,000 p.a.

You have 10% Dearness Allowance on your basic salary p.a. = Rs. 24,000

You should get HRA entitlement of Rs 1,20,000 p.a. from your employer 

Let us also suppose you pay Rs. 96,000 p.a. as rent for an apartment in Delhi.

Now, the total salary for computation of HRA would be:

2,40,000 + 24,000 (10% of 2,40,000) = Rs. 2,64,000

a) HRA amount received from your employer - Rs. 1,20,000

b) Actual rent paid minus 10% of your salary - Rs 96,000 – Rs 26,400 (10% of 2,64,000) = Rs. 69,600)

c) 50% of your basic salary if you live in a metro city - 50% of Rs 2,64,000 = Rs. 1,32,000

Therefore, the least of the three amounts mentioned above is Rs. 69,600. This will be your annual HRA exemption allowed. 

Related: How is taxable income calculated?

Important facts regarding HRA 

Individuals who have a home loan in their name, and are paying EMIs on the loan, can also claim HRA allowance. Additionally, salaried individuals who are not provided with HRA from their company can claim this deduction under section 80GG. 

Individuals living in a property owned by their parents can also claim HRA allowance by proving that they pay rent to their parents. However, parents receiving this amount must declare it as a rental income, while filing their tax returns. Here, it is important to remember that this rent will be considered as income from house property and that it will attract tax for the parents receiving it. 

Unfortunately, many have used this benefit to their undue advantage to save on taxes, even if they do not pay rent to their parents. By simply furnishing a rent agreement between themselves and their parents, individuals could claim HRA entitlement. 

This, however, is set to change. Recently, a salaried employee made the news when the rent receipts she submitted for paying rent to her mother was challenged by the tax tribunal. The receipts provided were not considered enough proof of HRA, thus rejecting her tax claim. Hence, as per new stricter HRA rules, there are certain measures individuals must make when claiming HRA exemption.

Related: Non-80C items that help you save tax

These include:

  • Submit the rent agreement mentioning rent, tenure, utility bills etc., even if the landlord is your parent /spouse. 
  • Declare the number of tenants sharing the accommodation and the ratio of a division of rent.
  • Providing bank statements as proof. Thus, it is advisable to make rent payments through e-banking or cheques.
  • Provide the landlord’s PAN number if the rent payable is more than Rs. 15,000 per month or Rs. 1 lakh a year. If the landowner’s PAN is not available, ask for duly filled Form 60.
  • You must physically live in your claimed rented apartment.
  • You must deduct tax at source (TDS) at 5%, from the payable rent in case your rent is more than Rs. 50,000 per month failing which, an interest of 1 -1.5% per month will be levied along with Rs. 200 per day penalty.

HRA is deducted from an individual’s total income and not from the taxable income, offering better tax savings to employees. To claim this deduction, employees can either submit rent receipts and the lease agreement to their company’s HR department at the time of proof submission, or later while filing income tax returns. 

Related: Income Tax Returns: Who should file them and when?

Crackdown on tax evaders 

Submitting fake rent receipts has been one of the most common ways for individuals to reduce their taxes, despite it being unethical. However, the new rules put in place by the Income Tax Appellate Tribunal (ITAT) is expected to change all this. Assessing officers can question individuals and ask them for additional documentation if they feel the rent receipts provided are not adequate proof. This is just one of several measures that the government has put in place to curb instances of tax evasion and black money. 

Failing to comply with these rules and providing fake rent receipts is considered fraud, and could result in serious consequences. 

So, ensure you are well versed with the tax filing process and that you have all the necessary HRA exemption documentation in place for filing returns. It will make the entire process smoother and quicker for you. 


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