Most employees receive House Rent Allowance as a part of their salary structure. But what are the House Rent Allowance exemption rules and benefits? Read our article to figure it all out.
House Rent Allowance (HRA) is made available to the people who are either salaried or self-employed and are living in rented accommodation that they do not own. The house rent allowance is useful for tax dispensation. Section 10 of the Income Tax act provides various sections that can help individuals to reduce their rent expenditures. An employee’s salary is divided into different components, and one of the major parts is the HRA. The employer and employee can sign up for a special agreement to decide the HRA. Also, it can either be fixed or can vary depending upon the various situations. With the help of section 80 GG, the self-employed people can also claim benefits for the tax exemptions, and all those people who do not receive any HRA from their employees can also use this to claim deductions in the tax.
Table of Content
- House Rent Allowance Exemption Rules: Save Tax On House Rent
- Who are eligible?
- The baseline of HRA
- Different limitations in which you can directly claim for HRA:
- Mandatory documents to claim HR for tax exemptions:
- Claiming HRA when living with your parents
- What if you own a house but you stay in a faraway city?
- So, What’s the correct method to calculate the HRA amount?
House Rent Allowance Exemption Rules: Save Tax On House Rent
Who are eligible?
If you want to claim the benefits of HRA, then you should satisfy the conditions below:
- You should be a salaried person
- Your salary structure has HRA as one of the components.
- If you are staying in rented accommodation that does not belong to you or your spouse.
- If you are a self-employed individual
The baseline of HRA
Your HRA will be decided based on your salary. Many factors that affect the House Rent Allowance of an individual, let’s have a look at all of them:
The city in which you live:
- If you are working and living in a metro city, then you are allowed to have your HRA as much as 50% of your total salary.
- But if you are living in a non-metro city, the maximum amount that can be declared for HRA is only 40% of the basic income.
The rent you pay for your rented accommodation:
- You are eligible to claim for HRA if and only if the rent that you annually pay is less than 10% of your annual salary.
So, finally, for the actual amount of money that can be claimed using HRA is calculated by comparing all the given choices, and the lowest one of them will be considered as your HRA tax exemptions. So, if you need to get the maximum amount of benefit through it, you should talk to your employer and then structure your basic salary appropriately.
Different limitations in which you can directly claim for HRA:
- If the rent that you pay for your residential accommodation exceeds the limit of 1 lakh rupees, then you can claim HRA against that. The only condition is that you have to also provide the PAN Card details of the property owner, and you have to attach all your rent receipts too.
- If wife and husband both are earning, they can both claim the HRA for tax exemptions only if they present different rent receipts for their residence. In case there is only a single rent that is being paid, only one of them is allowed to claim the HRA for tax exemption.
- In case your employer refuses to help you with the tax exemption profits through the house rent allowance scheme, you can still claim exemptions while you file your IT return. And the amount of money that is exempted from the tax will be refunded back to your account as the result of excess TDS.
- The HRA exemption is allowed only and only for the duration for which the rent is being paid to the landlord. Tax cannot be exempted, and HRA cannot be claimed for the time durations when there is no transaction of rent.
- The calculations of monthly HRA can differ if the employer has a change in the basic salary or for a change in the job location. Either he or she shifts from a metro to a non-metro city or vice versa.
- The employee can also avail of the benefits even if he/she is paying rent to their father. They will need to transfer the rent amount regularly and will have to keep official records to prove the same.
- If you are paying the rent to any other family member except father, then also they can claim for HRA as well as tax exemptions in income tax. For such cases, the payers are advised to pay the rent regularly and through bank transfers only so that there can be some official proof of the transaction.
Mandatory documents to claim HR for tax exemptions:
If an individual wants to claim HRA or get any benefits of the tax exemptions that are anywhere related to the house rent allowances, he or she should have the following documents for it.
All the receipt of the rent that the individual has paid. These receipts can be used continuously for 3 months so that you will require four receipts for a year.
The receipt should include
- Name of the property owner
- PAN Card details of the property owner
- Address of the particular rented place
- Name of the occupant
- The duration for which the competition is rented
- Revenue stamp that includes the signature of the property owner
- Copy of the rent agreement
Claiming HRA when living with your parents
You can also avail of the benefits of the house rent allowance when you live with your parents. All you need to do is fill a rent agreement form and transfer the amount of rent to your parent’s bank account each month and use these receipts to claim your HRA benefit.
This technique will help you and your parents to help save on a lot of taxes when you file your income tax return. Your parents can use the proof of rent that you pay them through their bank account statements to get the exemptions.
What if you own a house but you stay in a faraway city?
In this case, also you can avail of the benefits of house rent allowances if you own a house but cannot be used for your residential purpose, and you live in rented accommodation here in a different city.
So, What’s the correct method to calculate the HRA amount?
The parameters that are required to calculate the house rent allowances are:
- The basic salary of the employee
- HRA part of the basic salary
- The amount of rent paid
- Location of your rented residence
The actual calculation:
To calculate the HRA, first calculate and find the final amount of the following three cases:
Case 1: The actual HRA which you receive from your employer annually.
Case 2: Amount of money that you will be paying for your rent for an entire year.
Case 3: 50% of your basic salary if you are in a metro city and 40% if you are in a non-metro city
Now compare these three options, the amount which is the lowest amongst them will be considered as your house rent allowance. You can get exemption of that much amount of money from your income tax return.
The HRA is provided to the employee to reduce their taxable income and can save on a lot of tax when he/she file their ITR. Depending upon how much your income is and how much amount of rent you pay, you can utilize this section 10 of IT act to the fullest by carefully structuring your basic salary.