Introduction

HRA, or House Rent Allowance, is something that a lot of employees receive as part of their pay. It’s basically financially helping employees pay rent if they happen to be renting an apartment or home. In addition to paying rent, HRA can help employees when it comes to tax time. You could be eligible for full or partial tax exemptions on HRA payments under Section 10(13A) of the Income Tax Act. If you understand how HRAs work, you can help lower your taxes as well as worry about rent.

What is HRA?

It’s part of an employee’s pay that employers provide to help employees pay for rental expenses. However, HRAs (as noted above) have certain tax advantages that salaries do not. That advantage comes when employees can claim HRA tax-exempt payments. The amount that could be declared tax-exempt is based on the total salary the employee is earning, along with the amount of rent they are paying and their residence. When you calculate taxable income, HRA is calculated first (before calculating taxable income), which is extremely helpful to save tax.

It’s important to note that it is only viable to apply for HRA if they are paying rent. If you own your home and don’t pay rent, then the full amount of HRA you receive will be taxable, just like the rest of your salary.

Eligibility Criteria for HRA

Here are some important things to remember if you are thinking about taking the HRA exemption:

1. Eligibility: HRA exemption is only available to employees with a salary income. If you work for yourself, you will not be able to make a claim.
2. Part of Salary: HRA must be part of your total earnings from the employer.
3. Rented Space: To qualify for a claim, you must be taking rented space and paying rent in your name. If you occupy your place, you cannot claim this exemption. Overall, knowing HRA is important to maximize your salary and achieve the best savings possible for tax purposes.
4. Proof of Rent: To be able to claim your House Rent Allowance (HRA) exemption, you will need to inform your employer of the payments you have made towards your rent. Typically, this involves providing them with original rent receipts to substantiate the rental expense.
5. PAN number for Landlords with High Rent: For tenants with an annual rent over Rs. 100,000, you would be required to provide your landlord’s Permanent Account Number (PAN) to your employer. 
6. HRA exemption and Tax Regime: Just a word of caution, this exemption would only be valid if you chose the old tax regime while filing your Income Tax Returns (ITR).

Now, if you’re looking for tax benefits from HRA, here are the requirements: you need to be a salaried individual, have HRA included in your salary, and live in a rented home.

Tax Benefits of HRA 

So you pay rent, but you don’t receive HRA from your employer. What are your options? You can still claim a deduction under Section 80GG of the Income Tax Act, provided you satisfy certain conditions. You need to be a salaried or self-employed individual, you must not have received HRA during the previous year for which you are claiming 80GG, and neither you nor your spouse can own any house at the place where you are living.

A common query among salaried individuals is related to the exemption limits in the case of HRA. This exemption will be the lowest of the following four: actual HRA received, actual rent paid less 10% of salary, 50% of basic salary if the individual lives in a metro city, or 40% of basic salary if the individual lives in a non-metro city. To have the best benefit, it might be worth discussing with your employer to see if you can adapt your salary structure!

How is HRA Calculated?

HRA exemption is calculated as the lowest of the following:

• Actual rent paid minus 10% of basic salary
• Actual HRA received from the employer
• 50% of salary (for metro cities) or 40% (for non-metros)

Note: Salary includes basic, dearness allowance (DA), and applicable commissions.

Example:
Mr. A works in Delhi, earns a basic salary of ₹23,000, and pays ₹12,000 rent. His HRA is ₹15,000.

• Rent – 10% of basic: ₹12,000 – ₹2,300 = ₹9,700
• Actual HRA: ₹15,000
• 50% of basic: ₹11,500

HRA exemption = ₹9,700 (least of the three)

You can also use the Income Tax Department’s HRA calculator for accurate exemption figures.

Formula for HRA exemption:

• Actual HRA received
• 50% of salary (metro) or 40% (non-metro)

Rent paid minus 10% of salary

Factors Affecting HRA Exemption

As for how much HRA exemption you can avail of, this will depend on the following:

• Basic Salary + Dearness Allowance (DA): Obviously, a higher salary will decrease your exemption.
• HRA Received: Actual allowance you receive from your employer.
• Rent Paid: Rent paid must be greater than 10% of your salary to qualify for the exemption. 
• City of Residence: If you stay in a metro city (Delhi, Mumbai, Chennai, or Kolkata), you are allowed to take up to 50% of your salary; otherwise, you will be allowed 40%.
• Any alterations to those: salary, moving to another city, or paying a higher rent – can all affect your HRA exemption calculation.

How to Claim HRA in ITR

If you did not submit Form 12BB to your employer, do not worry, you can still claim your HRA while filing your Income Tax Return (ITR). Here’s how:

Calculate the Exemption: You can calculate who is entitled to the exemption by using the standard method to determine the lowest of the three HRA exemptions, which can be evaluated in terms of;

(i) Actual HRA received,

(ii) Rent paid, less 10% of his salary, and

(iii) 40% or 50% of your salary, concerning your place of residence.

Adjust your Taxable Income: All you need to do is deduct the entitled HRA exemption and whatever else you are entitled to from your gross salary to arrive at your taxable income.

Select the Correct ITR Form: Select the suitable ITR form based on your income type
Enter HRA Details: In the form, provide the actual HRA received and the calculated exempt amount.
Keep Documentation Ready: Maintain rent receipts, lease agreements, and any other proof of rent payment, in case the IT department requests verification.
This ensures your HRA exemption is correctly claimed and helps reduce your tax liability.

Special Scenarios & FAQs

1) Are you allowed to claim HRA if you live with your parents? 

Yes, you can claim HRA even if you are staying with your parents, as long as you are paying rent to them. You would need some supporting documents, rent receipts, and a rent agreement to support your claims. Your parents should claim this rental income on their taxes as well. 

2) Can you claim home loan benefits along with HRA?

Yes, you can claim both HRA exemption and home loan interest benefit (under section 24(b)) and Principal repayment benefit (under section 80C) if the house/property owned is not the house where you are residing. (for example, if it’s a rented house, or if the owned property is under construction and you are forced you live as per the place of work). 

3) Can you claim HRA exemption if your own house is our accommodation still?

No, HRA exemption cannot be claimed if you have a self-owned accommodation. HRA is to compensate your rental expenditure, if no rent is paid, then all HRA is taxable.

Conclusion

House Rent Allowance (HRA) can be a good salary component. It’s tax-free. You may be able to take advantage of HRA if you are an employee or company driver of an employer in India, if the employer paid HRA, and you fulfilled a few conditions determined by the Government of India, such as the minimum HRA is 50% of your basic salary, and you are paying rent in a 30% tax bracket.