House rent allowance (HRA) exemption explained: How to calculate, tax saving benefits and more

Renting a house can be a significant expense, especially in today's world. But did you know there's a way to get some relief on your housing costs? Enter House Rent Allowance (HRA), a valuable benefit offered by many employers in India. In this article, we'll explain everything you need to know about HRA - what it is, how it works, and how to maximise your exemption.

What is HRA or House Rent Allowance?

House Rent Allowance is a significant part of many workers' compensation packages. It provides financial relief for employees who pay rent. However, the tax treatment of this allowance is not straightforward. Depending on the amount of rent you pay compared to your HRA and other salary components, the deduction might be partial or even zero, according to Section 10 [13A] of the Income Tax Act.

How to calculate HRA exemption?

According to  Section 10 [13A] of the Income Tax Act, 1961, salaried individuals in India can claim an exemption on their House Rent Allowance (HRA). This exemption is calculated by taking the minimum value among the following:

- The HRA amount received from the employer.

- The applicable percentage (50 percent for metro cities, 40 percent for non-metro towns) of the employee's basic salary plus Dearness Allowance (DA).

- The actual rent paid minus 10 percent of the basic salary and DA.

Also Read: How to pay income tax challan due: Complete step-by-step guide

HRA exemption and tax deduction

To claim an exemption for HRA, you must meet these requirements:

1. Live in rented accommodation: This means you can't claim HRA if you're living on self-owned property.
2. Receive HRA as part of your Cost to Company (CTC): Your employer must include HRA in your salary package to be considered for tax exemption.
3. Submit valid rent receipts and proof of rent payments: You'll need documentation to support the actual rent you're paying when filing your tax return.

HRA for self-employed individuals

Tax relief for housing expenses is not available to self-employed individuals under the current Income Tax Act rules. However, they can still find tax advantages related to rental housing via Section 80GG. This section lets them deduct a portion of their rent payments from their taxable income, following specific limitations.

Also Read: Section 80D of income tax act: Deductions, eligibility and benefits

HRA for salaried individuals

Again, the Income Tax Act offers tax relief for housing expenses for salaried individuals in India. Section 10 [13A], rule number 2A specifically allows them to claim exemptions for House Rent Allowance.

How to claim an HRA exemption?

Follow these steps to claim HRA exemption in India:

- Gather documents: Collect your rent receipts for the entire financial year and a copy of your rental agreement. If your annual rent exceeds ₹1 lakh, you'll also need your landlord's PAN card details.

Two options for claiming exemption:

1. Via employer: If you want your employer to consider an exemption for HRA while calculating your TDS (Tax Deducted at Source), submit the documents to your HR department during the tax filing period (usually the last quarter of the financial year). They will factor in your HRA for tax calculation purposes.
2. During ITR filing: If you haven't submitted the documents to your employer, you can claim the exemption while filing your Income Tax Return (ITR). Mention the HRA amount received and the details of your rent payments in the relevant sections of your ITR form.

Claim deduction under Section 80GG

To qualify for a tax deduction under Section 80GG, you'll need to consider three factors:

1. A fixed monthly amount (Rs5,000).
2. A percentage of your adjusted total income (25 percent).
3. The difference between your actual rent and 10 percent of your adjusted total income.

The lowest of these three amounts will be the maximum deduction you can claim for your rent payments.

Also Read: Form 26AS tax credit statement: How to view and download

Claiming HRA on home loan interest

You can claim both benefits: tax exemption on your HRA and deduction for your home loan interest. There are two scenarios to consider when claiming HRA while owning a house:

Same city: If you're renting in the same city where you own a house, you'll need a valid reason (like a faraway office) to claim HRA. If approved, you can enjoy both benefits.

Different cities: If your job relocation forced you to move to a different city, you can claim HRA and home loan deductions without special justification.

Benefits of claiming HRA exemption

Claiming exemption for HRA offers several advantages for salaried individuals in India:

1. Reduced tax liability: The biggest benefit is a potentially significant reduction in your overall tax liability. By lowering your taxable income through the HRA exemption, you might fall into a lower tax bracket or owe less tax overall.
2. Financial relief: HRA helps offset the financial burden of renting an apartment, particularly in major cities with high rents.
3. Flexibility in choosing accommodation: Knowing you can claim an HRA exemption might give you more flexibility when choosing your rental accommodation. You might be more open to considering locations with slightly higher rents but offering other benefits like better amenities or proximity to work.
4. Increased take-home pay: Since the HRA exemption lowers your taxable income, it can also lead to a higher take-home pay each month. This translates to more money in your pocket that you can use for savings, investments, or other expenses.
5. Paperwork benefits: HRA receipts and rental agreements can be helpful documents when applying for visas, loans, or other purposes requiring proof of residence.

Things to consider when claiming HRA exemption

Claiming HRA exemption can be a valuable tool; however, there are a few key things to remember:

1. First, you must be a salaried employee receiving HRA as part of your compensation package. Self-employed individuals have different options for claiming deductions on rental housing.
2. Second, the HRA exemption amount is based on the lowest of three factors: your actual HRA received, a specific percentage of your salary based on your city of residence, and your actual rent minus 10 percent of your salary.
3. Finally, you'll need to maintain proper documentation, such as rent receipts and your rental agreement, for verification purposes. By understanding these eligibility requirements and how the exemption is calculated, you can take advantage of this benefit and potentially save money on your taxes.

Frequently Asked Questions (FAQs)

How do you submit HRA proof for Income Tax Returns?

Claim HRA on your tax return in two ways:

1. Through employer: Submit rent receipts & rental agreement (landlord's PAN if rent > Rs. 1 lakh) for employer to consider HRA deduction.
2. During ITR Filing: Attach rent receipts and a copy of the rental agreement, and claim the HRA amount while filing the ITR (Form 16 is needed, too).

Keep all documents for verification.

What is the HRA maximum limit?

There's no direct maximum limit for HRA. It's capped at the lowest of your actual HRA received, salary factor (linked to the city), and actual rent minus 10 percent of your salary.