House rent allowance(HRA) is one of an important component of an employee salary given by the employer to meet the cost of rented house taken by an employee for his stay, apart from this there is the tax advantage on this HRA component also. However to claim the HRA exemption under income tax act, an employee needs to be reside in the rented house and if you are residing in your parents’ house and paying rent to them, then also you can claim the HRA. The exemption under HRA is covered under the Section 10(13A) of the Income tax act, 1961, in accordance with Rule 2A of the Income tax Rules.
Calculating HRA for tax exemption:
Minimum of below three would be allowed as HRA exemption under Income tax act:
- The actual rental allowance paid by the employer as part of the salary.
- The actual rent paid, from which, 10% of the basic pay is deducted,
- 50% of the basic salary if residing in a metro or 40% if in a non-metro.
Meaning of salary for HRA calculation:
Salary for HRA purposes is as follows:
- Basic salary
- Dearness Allowance, if provided
- Commissions earned
Let’s take an example of Hari Mohan whose basic monthly salary is Rs 5000 and dearness allowance is 75% of the basic. He is residing in Delhi and paying an actual rent of Rs 4500 per month while his employee pays him a monthly HRA of Rs 4000.
Now his actual salary works to be Rs [5000*12] + [.75*5000*12] = Rs 1, 05,000.
Actual annual HRA which he would be receiving Rs 4000*12 = Rs 48000 and though he resides in Delhi, take 50% of his basic salary as Rs 52500.
The actual rent paid is Rs 54000 and 10% of his basic salary works out to be Rs 10,500; the difference being Rs 54000-Rs 10,500 = Rs 43500.
The minimum of the above three is Rs 43500. So Rs 43500 of HRA is exempt from the tax, while the remaining Rs 4500 would be taxable.
Points to remember:
- If the rent paid to the landlord is more than Rs 1 lakh in a year, then the PAN card number of the landlord needs to be furnished.
- No exemption would be given if the employee has stayed in his own accommodation not in the rented accommodation.
- HRA can be claimed if the employee is in receipt of HRA from his employer.
- Self employed individuals cannot claim HRA exemption under this act, only salaried individuals can claim this exemptions.
- Rent paid to spouse cannot be exempted as relationship between the husband & wife is not commercial in nature and they are supposed to stay together.
- You need to keep safe all of your rent receipts duly signed by your landlord as it will act as a proof and these are also required to be furnished at the time of submitting proof to the employer.
And from the tax incentive point of view, it is “Ice on the Cake” when you taken a home loan and not staying in that home due to any of the logical reason like the home which you have bought by taking the home loan is in different city, then in this case, you will be eligible for Sec 80 c benefit for the principal amount and Sec 24 benefit for the interest amount for the EMI you are paying on your home loan along with the HRA exemption.
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