Friday 31 January 2020

House Rent Allowance (HRA) | Tax Deductions on House Rent Allowance

House Rent Allowance (HRA), Tax Deductions on House Rent Allowance


What is HRA (House Rent Allowance)?

HRA is an amount paid by employers to his employees as a component of their salaries. The amount of HRA is actually decided based on certain criteria like the salary and the city of residence.

If you receive HRA as part of your salary and live in rented accommodation, then you can claim full or partial tax exemption on HRA. However, if you don't live in rented accommodation, this allowance is fully taxable.

Who can avail HRA?

HRA benefits are only available to salaried individuals who have the HRA as a component in their salary and are living in rented accommodation.

To claim the deduction, you must actually pay rent for the house which you occupy. If you live in your own house then you cannot claim tax exemption on HRA.

The income tax exemption from HRA is available to you only for the period in which the rented house is occupied by you. Self-employed professionals also cannot avail the benefit of tax deduction.

Calculation of HRA

Following four factors are considered when calculating the tax on House Rent Allowance
1. Salary of the employee.
2. HRA component of the salary.
3. Actual rent paid.
4. Location of rented accommodation.

How much HRA is exempted from tax?

The income tax exemption from HRA will be the lowest of the following three provisions:
1. The actual amount received as the House Rent Allowance from the employer.
2. Actual rent paid annually less than 10% of the basic salary.
3. 50% of the basic salary for those staying in metro cities and 40% of basic salary if staying in non-metros.

For Example
Suppose Mr. Shyam earns a basic salary of Rs 24,000 per month and he lives in New Delhi. He also receives a House Rent of Rs 8,000 per month. He pays Rs 8,500 rent per month for his rented accommodation in New Delhi. How much HRA exemption he will get?

Solution
The minimum of the following three amounts shall be available as deduction yearly and the rest amount is taxable.
1. Actual HRA received (8000X12) = Rs 96,000.
2. 50% of basic salary (metro city) [(Rs. 24,000X12) X 50%] = Rs. 1,44,000.
3. Actual rent paid annually (Rs. 8,500X12) – 10% of annual salary [(Rs. 24,000X12) X 10%] = Rs. 73,200.

Rs. 73,200 is the least amount among the above-obtained figures therefore, Mr. Shyam will get Rs. 73,200 tax exemption and the balance of HRA received (96,000 – 73,200 = 22800) will be added to his gross total salary.

Documents Required

You have to produce duly stamped rent receipts or the rent agreement with the house owner to the employer before the end of the financial year for availing HRA exemptions. The rent receipts should contain details of the rent amount, name and signature of your landlord, complete address of the rented property.

Note that it is mandatory for you to submit a copy of the PAN card of the landlord to the employer if the annual rent paid exceeds Rs 1,00,000. If your landlord does not have a PAN card then you should get a declaration from your landlord about the same.

What do you do if you missed to submit the above-mentioned documents to your employer?

If you missed to submit the above-mentioned documents to your employer/your HR department, you can claim HRA directly when you are filing your income tax returns (ITR) by including the HRA amount in your taxable income before calculating the tax.

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House Rent Allowance (HRA) | Tax Deductions on House Rent Allowance

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