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

What Is HRA? Who Is Eligible To Get HRA?

DG Gupta
DG Gupta, CA, CS

Jul 20, 2021 00:50

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.

What is 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.

HRA Guidelines

The following pointers cover some of the most important regulations governing house rent allowance.

  • It is not essential to pay rent exclusively to a landlord to qualify for HRA benefits. Individuals might claim HRA exemption by paying rent to their parents and showing appropriate receipts.
  • HRA gets computed at 40% of the base pay for employees living in non-metro cities and 50% for those residing in metro cities such as Mumbai or Chennai.
  • It is important to furnish the landlord's PAN card information to make applicable tax deductions from their property income (rent received).
  • You cannot, however, claim HRA exemption by demonstrating that you pay rent to your spouse. This practice is not permissible under income tax legislation.
  • Rent receipts must be presented as proof to qualify for the tax exemption advantage.
  • Only if the rent paid surpasses one lakh rupees per annum are landlord PAN information necessary.
  • HRA received by an employee who currently lives in their own house is not exempt from income tax.

How do you calculate HRA Exemption?

The HRA exemption procedure is detailed in detail in the section below. But first, consider the elements that influence HRA calculation and tax exemption.

Factors Affecting HRA Calculation:
  • HRA Recipient's Salary
  • Full payment of due rent is essential.
  • Residence location (metro, non-metro or rural)

How to calculate HRA?

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 SalaryINR 30,000
HRAINR 13,000
Conveyance AllowanceINR 2,000
Special AllowanceINR 3,000
Leave Travel AllowanceINR 5,000
Total EarningsINR 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.

HRA Tax Benefits

  • The real rent you pay must be less than 10% of your basic salary.
  • The real amount provided by your company as HRA
  • If you reside in a metropolitan region, you will be paid 50% of your basic income and 40% if you live elsewhere.

HRA Eligibility Criteria/ Exemption

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:

  • Actual HRA (House rent allowance) component of salary
  • If a person lives in New Delhi, Kolkata, Mumbai, or Chennai, he will receive 50% of his base income; if he lives in any different city, he will receive 40%.
  • Actual rent amount paid minus 10% of basic pay.

Where "base salary" refers to the amount of the basic salary plus DA and a fixed-rate sales commission.

Documents Required Claiming HRA Tax Exemption.

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.

How Do You Claim a Section 80GG Deduction?

To claim a deduction under Section 80GG of the Income Tax, the lowest of the following shall be considered:

  • Monthly salary of INR 5,000
  • A quarter (25% )of the total adjusted income
  • The actual rent is 10% less than the total adjusted income.
  • Adjusted Total Income is total income less long-term capital gains and short-term capital gains under sections 111A, 115A, or 115D, as well as deductions under sections 80C - 80U.
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.

Situation 2.

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.

Gotaxfile is here to simplify your HRA and tax filing compliances!

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!

DG Gupta
DG Gupta, CA, CS

Jul 20, 2021 00:50

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