Meaning of House Rent Allowance and How Does it Cater to Tax Exemption?

Meaning of House Rent Allowance and How Does It Cater to Tax Exemption

Have you ever wondered about the meaning of house rent allowance and why it is in your salary structure? House rent allowance, commonly termed as HRA, is an amount paid by the employer to its employee as a part of their salary. HRA helps reduce the cost of accommodation and claim tax deductions.

Housing payments are significant things that take a considerable portion of the income from the taxpayer’s living expenses. The employer determines how much HRA should be paid to the employee—There are several criteria, like an employee’s salary, their city of residence and so on.

HRA is an essential part of the salary since it’s a type of remuneration paid for an employee’s accommodation expenses. Since it is a significant part, it can attract a fair share of tax if the available HRA income tax exemption is not availed.

Section 10(13A) of the IT Act governs the HRA (House Rent Allowance). It serves to be a benefitting element to the salaried employees in the country.

As per law, salaried employees are the ones that can claim HRA (exempting self-employed individuals). But, even though they are exempted, they can claim tax benefits under section 80GG of the Income Tax Act.

Let’s have a look in detail to know more about HRA.

What is the house rent allowance?

You may be wondering, what is the meaning of house rent allowance? And, what does it considers?

HRA is a tax deduction amount that any salaried or self-employed person can claim from their annual income. It is done by filing an ITR (Income tax report), helping the individuals in India save some tax.

The HRA covers paid and self-employed workers, but both need to be done differently (This discussion falls under the Rule 2A of the Income Tax Rules and section 10 (13A) of the Income Tax Act).

Who can avail of HRA tax benefits?

For you to be eligible and take the tax benefits on HRA, you need to:

  • Be a salaried employee, individual
  • Have the mention of HRA component in your salary structure
  • Live in a rented apartment/unit

What if you are paying rent for accommodation but do not have an HRA structure in your payment? You are still eligible to claim the deduction—through Section 80GG of the Income Tax Act. To be eligible for it, you have to fulfil certain conditions, which include:

  • You need to be a salaried employee or a self-employed individuals
  • You need to prove that you haven’t received HRA at any point in time. And that is why you’ve claimed 80GG.
  • Neither you nor your spouse has any residential property under your name (where you are currently staying)

HRA rules: What you should know

Below are some of the crucial rules related to house rent allowance:

  • For calculation of HRA, 40% of the basic salary is calculated only for those living in non-metro cities. The same is calculated as 50% of the basic salary for metro cities like Mumbai and Chennai.
  • For you to enjoy the benefits of HRA, it is not a compulsion to pay rent only to the landlord. Individuals can pay rent to their parents, relatives, or friends, and they must prove it with a proper receipt to claim HRA exemption.
  • Individuals cannot claim HRA exemption if they prove they are paying their spouse’s rent, and it doesn’t cover the Income Tax law and isn’t permissible.
  • You must submit a rent receipt as proof of the rent payment, which will help you avail of taxes.
  • The landlord’s PAN card details need to be submitted, which will help make tax deductions from the income from the property.
  • The PAN card details are only necessary if the rent amount exceeds lac rupees per annum.

The meaning of house rent allowance is pretty simple to understand now with all the rules. But, there are a few things you need to remember. You need to provide your employer with accurate details at the. It has to be related to rental information, so your company will credit accordingly as per the eligible amount. It will help you with the relief before deducting tax at the source.

Another alternative to the above process includes claiming the exemption after filing the tax return and seeking a refund.

Calculation of HRA exemption—Salaried employees

Now that you know how crucial HRA is in an individual’s salary. It is essential to understand how the calculations of HRA work. It is the total amount your employer allows for your home rent.

It acts as a benefiting element calculated for tax deductions for a particular financial year. Furthermore, it reduces the taxable income every individual pays and is only for salaried individuals living in rental accommodation. If an employee stays in a house owned by them, they are not eligible for it.

The exemption on your HRA benefit is the minimum of:

  • The accommodation rent must be less than 10% of your basic salary.
  • For metro city individuals, it is 50%, and for non-metro cities, it is 40% of the basic salary.
  • The actual amount permitted by the employer is the HRA.

Note:

Only the least of the amount from the pointers mentioned above will be taken into consideration. It is best to discuss with your employer to get the maximum benefits from tax exemption, and they can accordingly restructure the salary to benefit you the most.

Learning with the example for calculation

So, after the meaning of house rent allowance, it’s time to see the practical side. Let us take a practical example to understand the tax exemption carefully.

Imagine living in Chennai; the basic salary is 60,000 rupees per month. Your HRA component in the salary is Rs 20,000; however, your rent is around 15,000 rupees.

  • Actual HRA received in the year (Rs 20,000 X 12) = Rs 2,40,000
  • Actual rent paid (Rs 15,000 X 12 = Rs 1,80,000) – 10% of salary (Rs 48,000) = Rs 1,32,000
  • 50% of basic salary [(Rs 60,000 X 12) X 50%] = 3,60,000 rupees

In this case, the least amount from the top pointers is 132 lacs. It means you will be eligible for an income tax exemption of about 1.32 lakh. It is best to submit the monthly receipts for the rent you are paying to claim the HRA exemptions.

HRA rules for self-employed individuals

For those who are not salaried employees, they are capable of claiming HRA deduction as well as tax exemption. It is covered under Section 80GG of the Income Tax Act, and this section also applies to salaried individuals who do not have an HRA element in their payment structure.

Following are the HRA regulations under Section 80 GG:

  1. Only those who fall within the Act’s definition of a HUF (Hindu Undivided Family) are eligible for the house rent allowance or HRA exemption.
  2. Rent deductions are only available to salary and self-employed individuals. And only in this case if they are not exempt from paying taxes by Section 10-13A’s rules.
  3. People who want the benefits of HRA exemption under Section 80 GG need to follow one thing—They must not claim tax benefits from any other self-occupied property they own anywhere.
  4. People who seek to claim an HRA deduction under Section 80 GG must submit a self-declaration. This self-declaration is in the form of form 10-BA, and this form will require the applicant to meet all the requirements.

How to save your HRA?

Here are a few things you can keep in mind to save your HRA.

Claiming HRA when living with your parents

If you’re staying with your parent, and the income is low, below the taxable income slab, pay them the rent. One of the ways to do so is to enter into a rental agreement with your parents.

Here, you can pay them the desired amount, a sum of money as rent each month. It will help you claim HRA, and you need not have to pay the tax. However, your parents will need to show the rent paid by you on the ITR.

Claiming tax benefits on home loans as well as HRA

The tax benefits on HRA become eligible only when you pay rent for the accommodation. However, availing of tax benefits on a home loan along with HRA tax benefits is possible.

It is when your home is rented out, and you’re staying in a rented apartment. In this case, you have to share the detail of your rental income and any income from the property owned. This way, the government will deduct the appropriate tax on the property.

However, if the rental or owned property happens to be in the same city, the tax exemption on both will not be possible.

If you can prove that your owned property is far from the rented property, you can proceed with the claim. You also need to prove that the rented property is close to your work, and owned property is far! This way, the tax exemption on both HRA and housing loans can be claimed easily.

Conclusion

Without understanding what is right as an employee, you may find yourself in a pitfall. Undoubtedly, the most significant benefit of HRA is its ability to reduce taxable income. Therefore, many people are keen to know the meaning of house rent allowances.

People may own a house in their home city while renting a place in another due to a job. The organisation, in that case, needs to compensate the employee for the housing expenses.

So, now you know the benefits of HRA and how much it covers. Hence it is time to take action and see if you’re getting what you deserve.

FAQs

When am I eligible to claim exemption on HRA?

If you pay rent for your accommodation, you are eligible for tax exemption on HRA.

How can I claim for HRA tax exemption?

You must submit proof of rental receipts to claim for HRA tax exemption. You can submit it to the employer or claim the same by yourself while filing your ITR (income tax return)

Can I claim an HRA exemption if I am a self-employed individual?

No, a self-employed individual cannot claim for HRA exemption. Only salaried employees are eligible if they have HRA in their salary structure.

If my tax-exempt doesn’t cover the entire HRA, what is my tax liability in that case?

Employer will deduct a TDS, which will be calculated based on the tax slab rate and done on your balance HRA, which isn’t exempted.

Which type of salaried employee can claim for HRA exemption?

Those salaried employees receive HRA as a part of their salary structure. And, those who are paying rent for residential accommodation can claim the same. It will help reduce the taxable salary, if not wholly, but partially!

HRA comes under which section of the income tax?

The House rent allowance that an employer provides to the employee is discussed in conditions laid out in Section 10(13A). It can be exempted, both partially or wholly.

What is the HRA exemption if more than one family member is paying rent?

In case more than one family member is working and earning moment. It can be you and your spouse paying for the house rent, and you can claim the HRA-related tax. You both individually create separate rent payment receipts. However, if only a single rent is paid, either one of you will be eligible to claim HRA exemption.