House Rent Allowance (HRA) is a component of salary provided by employers to employees to meet rental expenses. HRA is crucial for those who’re living in rented accommodations. Claiming HRA exemption can significantly reduce your taxable income, making it crucial for you during the tax season. You must be wondering how you can save on taxes with the help of HRA.
This guide will help you understand how to calculate and claim HRA exemption in a simpler manner.
What is HRA Exemption?
HRA exemption is a tax benefit provided to salaried individuals who live in rented accommodations. It helps in reducing the taxable income, leading to lower tax liability. You can save a substantial amount of money if you understand and claim this exemption correctly.
Who Can Claim Tax Deduction on HRA– Eligibility Criteria
You can claim a part of HRA as a tax deduction according to Section 10(13A) of the Income Tax Act if the following criteria are met:
- You are a salaried individual.
- You receive HRA as part of your salary.
- You live in a rented house.
- You are actually paying rent, and rent receipts are issued in your name.
Note: Tax exemption for house rent allowance is not available if you opt for the New Tax Regime from FY 2020-21 (AY 2021-22). HRA exemption is available only under the Old Tax Regime.
How to Calculate House Rent Allowance (HRA) Exemption?
Step-by-Step Guide
Calculating HRA exemption might seem complex, but it becomes manageable when broken down into simple steps. The exemption is based on the least of the following three amounts:
- Actual HRA received from the employer. This is the exact amount of HRA that is provided by your employer as part of your salary.
- 50% of the basic salary if you live in a metro city (40% if in a non-metro city). This is calculated based on whether you reside in a metro city like Delhi, Mumbai, Chennai, or Kolkata, or in any other city.
- Rent paid minus 10% of the basic salary. This is the amount by which your rent exceeds 10% of your basic salary.
To understand this better, let's delve into the components involved in the calculation.
Components of Calculation
- Basic Salary: This is the core component of your salary, excluding any allowances, bonuses, or other benefits. It forms the foundation for calculating your HRA exemption and is a fixed part of your monthly income.
- HRA Received: The House Rent Allowance received from your employer is specifically designated for covering your rental expenses. This amount is clearly mentioned in your salary slip and varies depending on your employer’s policies.
- Rent Paid: This is the actual rent you pay for your accommodation. It should be supported by valid rent receipts and a rental agreement. Only the rent paid for the house you live in can be considered for HRA exemption.
- 10% of Salary: This is a crucial factor in the calculation. It represents 10% of your basic salary. When calculating HRA exemption, the rent paid minus this 10% of salary gives you the amount that exceeds the baseline, which is necessary to determine the exemption.
Example Calculation
Example 1: Rohit Mehra’s HRA Calculation
Rohit has a basic salary of Rs 50,000 per month and receives an HRA of Rs 20,000 per month. He lives in a metro city and pays a monthly rent of Rs 15,000. Here's how the calculation would look:
- Actual HRA received by the employer: Rs 20,000
- 50% of basic salary: Rs 25,000 (50% of Rs 50,000 since he lives in a metro city)
- Actual rent paid minus 10% of basic salary: Rs 10,000 (Rs 15,000 rent paid - Rs 5,000 which is 10% of Rs 50,000)
In this case, the HRA exemption will be the least of the three amounts mentioned above, which is Rs 10,000 per month. This means, Rohit gets an HRA exemption of Rs. 10,000 on his total income.
Breaking down each component helps to clarify how the HRA exemption is calculated and ensures that you can accurately determine your exemption amount. In order to reduce your taxable income and take advantage of the benefits offered under the old tax regime, understand and apply these steps.
Detailed Examples
Example 1: Single Individual Living in a Metro City
Let's take the case of a single individual living in a metro city. Suppose the individual has a basic salary of Rs 40,000 per month and receives an HRA of Rs 18,000 per month. They pay a monthly rent of Rs 12,000. To calculate the HRA exemption, we need to consider three components:
- The actual HRA received from the employer, which is Rs 18,000.
- Fifty percent of the basic salary, as the individual lives in a metro city. This amounts to Rs 20,000 (50% of Rs 40,000).
- The amount by which the rent paid exceeds 10% of the salary. In this case, it would be Rs 8,000 (Rs 12,000 minus Rs 4,000).
The HRA exemption is the least of the above amounts, which is Rs 8,000 per month. Therefore, the individual can claim an HRA exemption of Rs 8,000 each month.
Example 2: Family Living in a Non-Metro City
Consider a family residing in a non-metro city. The primary earner in the family has a basic salary of Rs 60,000 per month and receives an HRA of Rs 25,000 per month. The family pays a monthly rent of Rs 20,000. To determine the HRA exemption, we evaluate the following:
- The actual HRA received, which is Rs 25,000.
- Forty percent of the basic salary, applicable for non-metro cities, equating to Rs 24,000 (40% of Rs 60,000).
- The amount by which the rent paid exceeds 10% of the salary. This amounts to Rs 14,000 (Rs 20,000 minus Rs 6,000).
Here, the HRA exemption would be the smallest amount, which is Rs 14,000 per month. Thus, the family can claim an HRA exemption of Rs 14,000 each month.
Example 3: Employee Living with Parents and Paying Rent to Them
Now, let's consider an employee who lives with their parents and pays them rent. The employee has a basic salary of Rs 70,000 per month and receives an HRA of Rs 30,000 per month. The rent paid to the parents is Rs 25,000 per month. The calculation for HRA exemption involves:
- The actual HRA received, which is Rs 30,000.
- Fifty percent of the basic salary, as applicable in this case, amounting to Rs 35,000 (50% of Rs 70,000).
- The amount by which the rent paid exceeds 10% of the salary, equating to Rs 18,000 (Rs 25,000 minus Rs 7,000).
In this scenario, the HRA exemption is the least amount, which is Rs 18,000 per month. Therefore, the employee can claim an HRA exemption of Rs 18,000 each month.
Example 4: Employee Sharing Accommodation with Colleagues
Finally, consider an employee sharing accommodation with colleagues. The employee has a basic salary of Rs 55,000 per month and receives an HRA of Rs 22,000 per month. The rent paid is Rs 10,000 per month, representing their share of the total rent. To calculate the HRA exemption, we look at:
- The actual HRA received, which is Rs 22,000.
- Fifty percent of the basic salary, as applicable here, amounting to Rs 27,500 (50% of Rs 55,000).
- The amount by which the rent paid exceeds 10% of the salary, which is Rs 4,500 (Rs 10,000 minus Rs 5,500).
In this case, the HRA exemption is the least amount, which is Rs 4,500 per month. Thus, the employee can claim an HRA exemption of Rs 4,500 each month.
These examples illustrate how different living situations and salaries impact the calculation of HRA exemption. By understanding these scenarios, you can better navigate your HRA claims and optimize their tax savings.
Documents Required to Claim HRA
To claim HRA exemption, it's crucial to have the right documents in place. The following documents are essential for a smooth and successful HRA exemption claim:
- Rent Receipts: Rent receipts serve as proof of the rent you pay to your landlord. These receipts should ideally include details such as the amount of rent paid, the address of the rented property, the duration for which the rent is paid, and the landlord's signature. It is advisable to collect rent receipts regularly, preferably on a monthly basis, to avoid any last-minute hassles.
- Rental Agreement: A rental agreement is a legal document that outlines the terms and conditions between you and your landlord. This agreement should clearly mention the amount of rent, the rental period, and the details of both the tenant and the landlord. Having a valid rental agreement is crucial as it acts as a formal contract and provides a solid foundation for your HRA exemption claim.
- Landlord's PAN Details: If your annual rent exceeds Rs 1 lakh, you are required to provide your landlord's PAN (Permanent Account Number) details. This is a mandatory requirement set by the Income Tax Department to ensure transparency and prevent tax evasion. Make sure to request your landlord's PAN details well in advance to avoid any delays in the exemption process.
How to Prepare and Submit Documents?
- Maintain Records: It's important to maintain organized records of all your rent receipts and rental agreements. Keeping digital copies of these documents can be beneficial for easy access and backup. Ensure that the rent receipts are duly signed by the landlord and that the rental agreement is updated if there are any changes in the rental terms.
- Submission Process: The process of submitting your documents can vary depending on whether you are claiming the HRA exemption through your employer or directly while filing your Income Tax Return (ITR).
If you are submitting through your employer, provide them with the required documents, including the rent receipts, rental agreement, and landlord's PAN details, if applicable. Employers typically collect these documents at the beginning of the financial year or during the investment declaration period.
If you are claiming HRA exemption directly while filing your ITR, you need to enter the relevant details in the HRA section of the ITR form. Attach the necessary documents as proof of your rent payments. The ITR filing portals often have specific sections where you can upload these documents.
By ensuring that you have all the necessary documents and submitting them correctly, you can smoothly claim your HRA exemption and benefit from the tax savings it offers.
How to Claim HRA Exemption in ITR?
Claiming HRA exemption while filing your Income Tax Return (ITR) is a straightforward process if you follow the right steps and have all the necessary documents. Here’s a detailed guide to help you claim HRA exemption in your ITR filing:
Step 1: Log into the ITR Filing Portal
Begin by logging into the official Income Tax e-filing portal (www.incometaxindiaefiling.gov.in). If you do not already have an account, you will need to register by providing your PAN, name, and date of birth. Once registered, log in using your credentials.
Step 2: Navigate to the HRA Exemption Section
After logging in, navigate to the section where you can enter details for your tax return. This is usually under the "Income Details" or "Salary Details" section, depending on the ITR form you are filling out. Look for the subsection specifically for HRA exemption.
Step 3: Enter the Necessary Details
In the HRA exemption section, you will need to provide the following details:
- Basic Salary: Enter your basic salary amount. This is the fixed component of your salary excluding any allowances or bonuses.
- HRA Received: Input the total amount of HRA you have received from your employer during the financial year.
- Rent Paid: Enter the total rent paid by you for your accommodation.
Make sure to double-check these details to ensure accuracy, as incorrect information can lead to discrepancies or rejection of your claim.
Step 4: Upload Documents
To support your claim for HRA exemption, you may need to upload certain documents. These typically include:
- Rent Receipts: These should be for the entire year and signed by your landlord.
- Rental Agreement: A valid rental agreement that confirms the tenancy.
- Landlord's PAN Details: Required if the annual rent exceeds Rs 1 lakh.
Ensure all documents are clear and legible before uploading. Some portals may not require immediate document upload, but it is advisable to have them ready in case they are requested later.
By following these steps, you can accurately claim your HRA exemption, reducing your taxable income and thus your overall tax liability.
Common Mistakes to Avoid
- Incorrect Details: One of the most common mistakes when claiming HRA exemption is entering incorrect details. This can include errors in your basic salary, the actual HRA received, or the rent paid. Even small mistakes can lead to discrepancies in your exemption calculation, which might result in the rejection of your claim or even penalties.
It is crucial to double-check all the information you provide. Make sure your salary details match your payslips and the rent paid matches your rent receipts. Accuracy is essential to ensure your HRA exemption claim is processed smoothly. - Missing Documents: Another frequent mistake is not attaching the necessary documents. When claiming HRA, you need to submit rent receipts, a rental agreement, and, if the annual rent exceeds Rs 1 lakh, your landlord’s PAN details. Failing to provide these documents can lead to your claim being disallowed. Keep a meticulous record of all rent payments and maintain copies of your rent receipts and rental agreement.
When filing your ITR, ensure that all these documents are readily available and correctly uploaded. Proper documentation supports your claim and avoids unnecessary complications. - Overclaiming HRA: Overclaiming HRA is a mistake that can have serious consequences. Some taxpayers mistakenly claim a higher HRA exemption than they are eligible for, either due to miscalculation or misunderstanding of the rules. The HRA exemption is calculated based on specific criteria, and it is important to adhere strictly to these guidelines. Claim only the actual eligible amount as calculated by the formula.
Overclaiming can lead to penalties and interest charges on the excess amount claimed. It’s always better to be cautious and ensure that your claim is accurate and justified by your actual expenses.
By avoiding these common mistakes, you can ensure that your HRA exemption claim is processed without issues, helping you reduce your taxable income effectively.
FAQs about HRA Exemption
What if I forgot to submit rent receipts to my employer?
If you have forgotten to submit your rent receipts to your employer, you can still claim HRA while filing your Income Tax Return (ITR). During the ITR filing process, you will need to provide the necessary documents, such as rent receipts and a rental agreement. This ensures that you can still benefit from the HRA exemption even if you missed submitting the documents to your employer earlier.
Can I claim HRA if I live in my own house?
No, HRA can only be claimed if you live in a rented house and pay rent. The purpose of HRA is to provide relief to salaried individuals who incur rental expenses. If you live in your own house, you are not eligible to claim HRA as there are no rental expenses involved.
How does HRA exemption affect my taxable income?
HRA exemption directly reduces your taxable income. By claiming HRA exemption, the portion of your salary designated as HRA is deducted from your total taxable income, thereby lowering your overall tax liability. This can result in significant tax savings, making it an important benefit for salaried individuals.
What if I live in a different city than my workplace?
You can still claim HRA for the city you live in, provided you pay rent there. The key requirement is that you must be incurring rental expenses for the accommodation you are staying in. As long as you meet this condition, it does not matter if the rented accommodation is in a different city from your workplace.
To wrap it Up!
HRA exemption is a significant tax benefit for salaried individuals living in rented houses. By accurately calculating your HRA exemption and maintaining proper documentation, you can effectively reduce your taxable income and lower your tax liability. It is also important to remember that HRA exemption is only available under the old tax regime. If you have opted for the new tax regime, you will not be able to claim HRA exemption.
Filing your ITR on time ensures that you get all the benefits, including HRA exemption. Timely filing helps avoid penalties and ensures a smooth tax filing process. For a hassle-free experience, you can use our website’s ITR filing services. Our platform is designed to make the process easy and efficient, ensuring you maximize your tax benefits without any stress.
