How to calculate HRA exemption
How to Calculate HRA Exemption: A Complete Guide
In this post, we’ll talk about House Rent Allowance (HRA), how it saves your money on taxes, and how to calculate your HRA exemption. We’ll also review the necessary documentation and key factors to remember while claiming the deduction.
Let’s look at each section in detail:
What is HRA (House Rent Allowance)?
HRA stands for House Rent Allowance, which is an important part of your salary and is taxable. It is the amount your company pays you to cover the costs of living in a rented home.
HRAs help you manage your rental expenses while reducing your taxable income, helping you save on taxes. Let us examine the eligibility requirements for claiming HRA and how they are computed.
Eligibility Criteria for HRA Exemption
Section 10(13A) of the Income Tax Act allows you to claim a certain amount of your HRA as a tax deduction if you meet the following conditions:
- If you are a salaried worker.
- HRA is included in the salary you receive.
- You stay in a rented home.
- You are paying rent, and the rent receipts are in your name.
How to Calculate HRA Exemption?
You can claim a tax deduction for House Rent Allowance (HRA) based on at least one of the following:
- 10% of the basic salary minus the actual rent paid
- Actual HRA that was received from the employer
- If you live in Delhi, Mumbai, Chennai, or Kolkata, you will receive 50% of your salary; if not you will receive 40%.
Note: Basic salary, dearness allowance (DA), and any applicable commissions are all included in the HRA calculation.
Example
Imagine Mr Raj working for a salary and living in a rental home in Delhi. He pays ₹12,000 monthly rent and earns ₹15,000 in HRA from his company. His pay scale is as follows:
|
Salary Component |
Amount (₹) |
|
Basic Salary |
23,000 |
|
HRA |
15,000 |
|
Conveyance |
3,000 |
|
Medical Allowance |
1,250 |
|
Special Allowance |
2,300 |
|
Total |
44,550 |
The HRA deduction will be the minimum of the following:
- Rent paid minus 10% of basic salary = ₹12,000 – (10% of ₹23,000) = ₹9,700
- Actual HRA received = ₹15,000
- 50% of the basic salary (since Delhi is a metro city) = 50% of ₹23,000 = ₹11,500
The minimum amount is ₹9,700. Mr Raj may claim an HRA exemption of ₹9,700 on his taxable income.
Is HRA Taxable?
HRA (House Rent Allowance) is included in your salary, thus it is initially considered taxable income. However, Section 10(13A) of the Income Tax Act allows you to apply for a tax exemption, either partially or fully. This is often referred to as the HRA exemption. The entire HRA payment becomes taxed if you live in your own house (rather than renting).
Documents Required to Claim the HRA Exemption
- Rent Receipts
Rent receipts are a must for HRA claims.
They should include:
- Landlord’s name and address
- Rent amount paid
- Period for which rent is paid
The landlord should sign the receipt. Adding a revenue stamp is a good practice but not mandatory.
2. Rent Agreement
A formal rental agreement between you and your landlord is needed.
It should mention:
- Rent amount
- Duration of the agreement
- Other terms and conditions.
- Proof of Rent Payment
- Cancelled rent cheques or bank statements stating rent transfers might be used as proof.
- Payment receipts sent online are also acceptable.
- Landlord’s PAN
If your annual rent is more than ₹1,00,000, you must give your landlord’s PAN details. This is necessary to prevent tax evasion.
- Declaration Form (if needed)
Some employers may require you to fill out a declaration form saying that you pay rent and do not own a home in the given location.
- Form 10BA (if needed)
Self-employed people may be required to complete Form 10BA, showing that they pay rent but do not claim HRA benefits.
- Utility Bills
In your name, bills such as electricity or water might be used as further proof of residence.
- Occupancy Certificate (if applicable)
For newer houses, you may be required to present an occupancy certificate proving the residence’s legality.
Important Points to Remember for Claiming HRA Deduction
- If you pay more than ₹1 lakh in annual rent, you must provide your landlord’s PAN to claim HRA exemption. A signed declaration will be enough if the landlord does not have a PAN. Without one of these, you may lose the tax benefit.
- HRA deductions are based on where you live. If you live in a major city, such as Mumbai, Delhi, Chennai, or Kolkata, you can deduct up to 50% of your HRA. Other cities allow you to claim up to 40%.
- If you live in your own house, you cannot claim HRA.
- You can claim HRA if you live with your parents and provide sufficient receipts for rent payments. However, your parents must report this rental income when they pay their taxes.
- Rent paid to your spouse does not qualify for an HRA deduction.
So, that concludes this post. Please use the space below to ask questions or comment; we will gladly respond.
FAQs
1. How can I get an HRA exemption?
Ans: You can request an HRA exemption by producing rent receipt documentation for your employer. Alternatively, you can claim your HRA exemption yourself while filing your ITR.
2. Is there a special HRA rate for military personnel?
Ans: Armed forces personnel have a different HRA rate, according to the seventh CPC recommendations.
3. Which documents prove that I paid my rent?
Ans: Rent receipts paid during the previous financial year are eligible. If you don’t have the receipts, you must present financial papers proving you paid the rent.
4. Can both an HRA and a deduction be claimed on a home loan?
Ans: Yes, you can. The most recent update to the IT Act now allows for simultaneous applications.
