How to save tax on House Rent Allowance.
For most employees, House Rent Allowance (HRA) is a part of their salary. HRA is not fully taxable, a part of HRA is exempted under Section 10 (13A) of the Income-tax Act, 1961.
The amount of HRA exemption is deductible from the total income before arriving at a taxable income. This helps an individual to save tax. The HRA received from your employer, is fully taxable if an employee is living in his own house or if he does not pay any rent
Who can avail HRA?
This tax benefit is only for the salaried individuals who has the HRA component as part of his salary structure and is staying in a rented accommodation. Self-employed professionals are not eligible to avail the deduction.
It is the minimum of:
A. Actual HRA received
B. 50% of salary for metro cities, or 40% for non-metro cities.
C. Actual rent paid less 10% of salary.
For calculation of HRA exemption, the salary considered is ‘basic salary’. In case ‘Dearness Allowance (DA)’ (if it forms a part of retirement benefits) and ‘commission received on the basis of sales turnover’ is applicable, they too are added to compute the minimum HRA exemption available.
The tax benefit is available to the person only for the duration in which the rented house is occupied.
Note. If you have taken a house on rent and are making a payment in excess of of Rs 8,333 per month or (Rs 1,00,000 annually)– remember to obtain the landlord’s PAN or you may lose out on the HRA exemption. Landlords not having a PAN must be willing to give you a declaration
Example of HRA calculation
Let’s assume an individual, with a monthly basic salary of Rs 30,000, receives HRA of Rs 14,000 and pays Rs 15,000 rent for an accommodation in a metro city. The tax rate applicable to the individual is 20 percent of his income.
The least of the following amount (yearly) is exempted, rest is taxable:
a) Actual HRA received = Rs 1,68,000 (14000×12)
b) 50% of basic salary (metro city) = Rs 1,80,000 (50% of Rs 3,60,000)
c) Excess of rent paid annually over 10% of annual salary = Rs 1,44,000 (Rs 1,80,000 – (10% of Rs 3,60,000))
It shows that of Rs 1,68,000 actually received as HRA, Rs 1,44,000 gets tax exemption and only the balance of Rs 24000 gets added to the employee’s income, on which a tax of Rs 4800 ( 20 per cent slab ) gets payable.
HRA exemptions can be availed only on submission of rent receipts or the rent agreement with the house owner. Salaried employees earning HRA up to Rs 3,000 per month are exempt from the production of rent receipts
Special scenarios of claiming HRA benifits
Paying rent to family members
The rented house must not be self owned by the individual, claiming the tax exemption. So if you stay with your parents and pay rent to them then you can claim that for tax deductions as HRA. But, you cannot pay rent to your spouse. As, in the view of the relationship, you are supposed to take the accommodation together. Thus, these transactions can invite the observation from the Income -tax Department.
Even if you are renting the house from your parents, make sure you have documentary evidence as proof that financial transactions regarding your tenancy takes place between you and your parent. So keep a record of financial transactions and rent receipts because your claim can get rejected by the tax department if you are fail to convince them, the authenticity of the transactions.
Own a house, but staying in a different city
One can avail the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home is rented out or you work in another city.
Individuals who don’t get HRA but pay rent( Section 80 (GG) )
Some employees not having HRA component in their salary structure and might be paying rent. Section 80 (GG) of the Income-tax Act is helpful for them
An individual paying rent for a furnished/unfurnished accommodation can claim the deduction for the rent paid under Section 80 (GG) of the I-T Act, if he is not paid HRA as a part of his salary by furnishing Form 10B.
How much exemption is allowed under Section 80GG.
The least of the following is allowed for exemption from tax under Section 80GG:
(i) Rent paid in excess of 10% of total income
(ii) 25% of the total of the total income*
(iii) Rs 5,000 per month
Under this section, the total income is calculated as gross total income excluding long-term capital gains, the short-term capital where Securities Transaction Tax (STT) has been paid and deductions available under Sections 80C to 80U, except Section 80GG.
If an individual claiming a tax deduction, he must remember that the individual himself or his/her spouse, or minor child, or as a member of the Hindu Undivided Family (HUF) must not own any accommodation. Also, if the individual earns rent from residential property(self owned) at any place then no deduction is allowed.
One can claim the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home is rented out or you work in another city. But, not available in case of Section 80GG.