HRA exemption on income tax

Your basic salary is entirely taxable. However, this is not true for some other components of your salary, including the HRA component.

What is HRA?

Almost always, house rent allowance (HRA) is an integral part of a company’s salary structure. Employers basically expect employees to spend this amount on their accommodation requirements. The government offers tax deductions against the rent paid under the Income Tax (I-T) laws.

Unless the employee proves that he has used the amount for this purpose, the entire amount becomes taxable, and the employer will deduct tax at source accordingly.

Exemptions on this allowance are allowed under the I-T Act. According to Section 10(13A), a salaried person can claim tax benefits with respect to the house rent allowance from his employer on fulfilment of certain conditions.  Now, what are those conditions?

Conditions to claim rebate under Section 10(13A)

Following are the key conditions you ought to fulfil:

*Only salaried individuals can claim deductions under this section.

*HRA should be part of your salary package.

*You should be living in a rented accommodation in the city, where you work.

*The deduction is available only for the period, during which the accommodation is occupied by the taxpayer.

*To claim the benefit, the tenant will have to provide rent receipts. 

HRA exemption limits

The HRA exemption, a salaried person is eligible to receive, is the lowest of the following amounts, according to Rule 2A of Income Tax, 1962.

*The actual HRA you get

*50% of your basic salary plus DA, if you live in metro cities; 40% for non-metros

*Actual rent paid, minus 10% of your basic salary plus DA

HRA calculation sample 1

Delhi-based Rajat Ghai’s monthly basic salary is Rs 50,000 and he receives Rs 18,000 as HRA. For his rented house, he pays Rs 15,000 as monthly rent. In this case, the deduction will be the least of the three amounts.

*50% of his basic salary: Rs 25,000

*Actual HRA: Rs 18,000

*Actual rent minus 10% of the basic salary: Rs 10,000 (least of the three)

Annual deduction: Rs 1.20 Lakh

HRA calculation sample 2

Patna-based Ravi Prakash Kashyap earns Rs 20,000 as his basic salary. While his HRA is Rs 7,000, he pays Rs 6,000 for his rented quarter. In this case, the deduction will be the least of the three amounts:

*40% of his basic salary: Rs 8,000

*Actual HRA: Rs 7,000

*Actual rent minus 10% of the basic salary: Rs 4,000 (least of the three amounts)

Annual deduction: Rs 48,000

See also: Rent receipts and its role in claiming HRA tax benefit 

How to claim tax exemption on HRA?

Salaried people can claim this exemption through their employers by submitting house rent receipts in the last quarter of the financial year.

When you submit your rent receipts to your employers, you provide them a proof of your rental expense. This prompts them to deduct tax at source (more commonly referred as TDA) while keeping in view the exemptions. This is also the most uncomplicated way to claim tax exemption on HRA as the exemption would automatically flow into the part B of your Form 16 and tax return. From the assessment year 2019-20, the I-T department has synced the ITR-1 with Form-16.

Those who have not claimed this exemption through their employers can still do that while filing their Income Tax Return (ITR) for the financial year. The same is true for those whose company has deducted the TDS on the HRA component because of their failure to produce rent receipts. They can claim the excess of TDS cut at the time of filing their ITRs. The I-T department will refund the excess of TDS cut accordingly.

As you have not provided your employer with rent receipts, or any other documentary proofs, your Form-16 will show the HRA portion of your salary as taxable.

While filling your ITR form, you will have to provide every detail about your salary—basic salary, HRA, and other allowances. You will also have to provide details of that part of the HRA, which is exempted from tax deductions apart from the part that is not. The taxable portion of HRA component should be included as a part of ‘salary as per section 17 (1)’ while the exempted portion of the allowance should be added under ‘allowances to the extent exempt u/s 10′.

While you will not be required to send any documentary proof of the rent receipt for filing your ITR, you might be later asked by the Central Board of Direct Taxes (CBDT) to send the proof for the exemptions you have claimed. Be ready to send those as and when required.

How to claim HRA when living with parents?

Those living with their parents can also claim exemptions under HRA if they are paying rents under a legally valid rental agreement. For this, they will have to show rent receipts while their salary accounts should also match their claims, while declaring their rental expenses. Unless all these requirements are fulfilled, it may be a bad idea to claim deductions under HRA. In recent years, the I-T department has gone after the people attempting to claim deductions without incurring any expense. Note, the rent you pay to your parents would be calculated in your parents’ annual income. They will be liable to pay taxes for the same.

More importantly, this arrangement works only between parents and children and not between spouses and siblings.

See also: How to get HRA exemption on rent paid to family members?

How to claim HRA exemption if a company does not provide house rent allowance?

If you pay rent for any residential accommodation, but do not receive HRA from your employer, you can claim the deduction under Section 80GG by following the same process. Working professionals can also claim the HRA deductions under this section.

See also: Deduction on rent paid under Section 80GG

PAN requirement for HRA exemption claim

According to circular number 8/2013 issued by the tax department on October 10, 2013: “If annual rent paid by the employee exceeds Rs 100,000 per annum, it is mandatory for the employee to report PAN of the landlord to the employer.” This means that providing your landlord’s PAN details is must for filing HRA claims return in case the rent amount exceeds Rs 1 Lakh per annum.

However, individuals can still claim deductions in case their landlords don’t have a PAN card as I-T laws don’t mandate him to provide the PAN details of the landlord.

However, be ready with the paperwork in this case because any discrepancies might ignite suspicion in the eyes of the tax authorities that might initiate a probe against you.

“In case, the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employee,” the circular reads further.

Key points to remember when claiming exemptions on HRA

• Unless you are paying rent more than 10% of your salary, you will not be able to claim any exemptions on HRA.
• Those working public sector companies get an HRA exemption based on minimum or maximum HRA in cities according to the recommendations of Seventh Pay Commission.
• If you fail to submit rent receipts to your employer, the employer will not factor in the HRA exemption and deduct tax from the entire HRA amount.
• The tax exemption on HRA is not available in case you choose the new tax regime from financial year 2020-21 (assessment year 2021-22).
• Those paying rents to NRI landlords should deduct TDS of 30% before making the rent payment.
• India’s I-T law does not mandate that the tenant should pay the same landlord throughout the year. So how many places you change during the year makes no difference as far as exemptions are concerned.
• You can’t claim exemption for the period for which you have not paid the rent.
• There is no legal limitation on the mode of rent payment. You can pay the rent in any manner — cash, cheque, online channels, etc. All you have to do is to claim the exemption and produce a proof for making the payments. Your bank account statement, for instance, acts as the proof.

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