Written by : DG Gupta
A financial professional, qualified Chartered Accountants and Company Secretary examinations and enriched with experience of all types of accounting, taxation and compliance of Manufacturing as well as Service Industries
If you are a salaried taxpayer, you are probably familiar with the term House Rent Allowance (HRA). The HRA, in most situations, is an essential component of an employee's compensation that employers give to satisfy their housing needs. Self-employed individuals can also claim tax benefits for this.
In the past, many taxpayers commonly used fake rent receipts to obtain home rent allowance to lower the tax obligation. However, given recent events, it is wise to think twice before doing so since one may face the unwanted scrutiny of the Income Tax Department. Let's begin by understanding the meaning of HRA and how to calculate HRA.
HRA, or House Rent Allowance, is a pay component provided by employers to employees to cover the cost of renting a property for residential needs. HRA is a mandatory component of a person's pay. HRA applies to both salaried and self-employed workeINR HRA for salaried individuals is accounted for u/s 10 (13A) of the Income Tax Act in line with Income Tax rule 2A. Similarly, self-employed persons are not eligible for HRA exemption under this provision but may claim tax advantages under Income Tax Act section 80GG.
The following pointers cover some of the most important regulations governing house rent allowance.
The HRA exemption procedure is detailed in detail in the section below. But first, consider the elements that influence HRA calculation and tax exemption.
People frequently inquire about how to calculate HRA. Let's consider the case of Mr Rama, a paid man who lives in Bangalore. He lives in rented housing and pays INR 10000 per month in rent. This monthly payment comes to INR1.2 lakh per annum. His monthly earnings are shown in the following table:
|Basic Salary||INR 30,000|
|Conveyance Allowance||INR 2,000|
|Special Allowance||INR 3,000|
|Leave Travel Allowance||INR 5,000|
|Total Earnings||INR 53,000|
A PF payment of INR 2000 and a professional tax of INR 200 are taken from his paycheck every month. In Mr Rama's case, the tax-exempt portion of his HRA would be the lowest of the following, based on his yearly earnings:
|Actual HRA salary component:||INR 13,000 * 12 = INR 1.56 lakh|
|50 % of his basic salary, as he lives in Bangalore:||50 % * INR 30,000 * 12 = INR 1.80 lakh|
|Actual rent paid less than 10% of base salary:||(10,000 * 12) - (10% * INR 30,000 * 12) = INR 1.2 lakh – INR 36,000 = INR 84,000|
Because INR 84000 is the lowest sum above, this is the amount of tax exemption Mr Rama may obtain on HRA. The remaining HRA money will be taxed according to his income tax bracket to make applicable tax deductions. Now that we know how to calculate HRA let's dive into the benefits.
Employers select how much HRA to pay based on factors such as compensation structure, salary amount, and city of residence. It would be best if you discussed this with your employer to ensure that you save the most amount of tax permitted under the Income Tax Act.
Individuals' salaries or compensation can be described as the total of their base wage, DA (dearness allowance), and any/all extra commissions that may be relevant. HRA deductions will be calculated as minimum of followings:
Where "base salary" refers to the amount of the basic salary plus DA and a fixed-rate sales commission.
When seeking tax exemption for HRA, the essential document that must be given is rent receipts to the rental agreement. As a taxpayer, you will be eligible for this exemption even if you pay rent to your parents. You must submit your rent payment receipts as a taxpayer to receive HRA tax relief. In situations where the yearly rent of the dwelling unit exceeds INR 1 lakh, submission of the house owners PAN is also necessary. If the Houseowner does not have a PAN number, they might give a self-declaration mentioning it.
To claim a deduction under Section 80GG of the Income Tax, the lowest of the following shall be considered:
|The monthly rental maximum is INR 5, 000, which equates to INR 60, 000 per year.|
|Rent paid of INR 60, 000 less 10% of total adjusted revenue of INR 30, 000 equals INR 30, 000.|
|25% of the entire annual revenue of INR 75,000|
Because the second requirement is met in this situation, an HRA of INR 30, 000 can be claimed.
Ryan earns a salary of INR 3 lakh each year. He pays INR 5, 000 per month in rent, for a total of INR 60,000 per year. In this situation, the deduction is as follows:
|A monthly rental limit of Rs10, 000 per month equals INR 120, 000 per year.|
|Rent paid is INR 120, 000 less 10% of total adjusted revenue, which is INR 80, 000, for a total of INR 40, 000.|
|25% of total annual income, which is INR 2 lakh|
Because requirement number 2 is met in this situation, an HRA of INR 40, 000 can be claimed.
If you are among the many taxpayers perplexed with how to calculate HRA and your tax liability, the professionals in our team can help you. We have been addressing various tax needs of a diverse clientele and can surely assist you. Consult our team now more details!
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