The seasonal frenzy of calculating house rent allowance (HRA) surfaces from time to time, most often towards the end of every financial year or in the beginning of the year, when we contemplate tax planning. It is then that certain doubts and queries about the various tax components play havoc on our minds.
To put some of those queries to rest, here, we discuss the tax exemption that you can claim from your house rent allowance, which is part of the mix.
Here are some answers to general queries about the HRA:
1. How is HRA accounted for in the case of a salaried individual and a self-employed professional?
HRA is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. On the other hand, self-employed professionals cannot be considered for HRA exemption under this act, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under section 80GG, which resembles section to 10 (13A) but is subject to certain conditions.
2. What are the dependent factors in calculating HRA for the salaried individual?
When you are calculating HRA for tax exemption, you take into consideration four aspects, which include salary, HRA received, the actual rent paid and where you reside, i.e. if it is a metro or non-metro city. If these aspects remain constant through the year, then tax exemption is calculated as a whole annually, if this is subject to change, as in a rent hike, pay hike or shift in residence etc., then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.
The place of residence is significant in HRA calculation as the tax exemption for HRA in a metro city is 50 per cent of the basic salary, while that for non-metro cities is 40 per cent of the basic salary. This holds true especially when you work in a metro city, but reside in a non-metro city. In this case, only your city of residence will be considered for calculating your HRA.
3. Can I pay rent to my parents or spouse to avail HRA benefits?
You can pay rent to your parents. But, your parents will then need to account for the same under ’Income from other sources’ and will be entitled to pay tax for the same.
However, you cannot pay rent to your spouse. In view of the relationship when you take up residence together, such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny; so steer clear of these.
4. Do I need to submit any proof for my HRA claim?
You need to submit proof of rent paid through rent receipts, once at the beginning of the year and once towards the end of the financial year. It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, and name of the person who rents it.
4. How do I calculate my HRA?
To figure out how much HRA exemption you are eligible for, consider the following three values:
a. The actual rent allowance that the employer provides you as part of your salary
b. The amount of rent you pay for your house in excess of 10 per cent of your basic pay
c. 50 per cent of your basic salary, when you reside in a metro city or 40 per cent if you reside in a non-metro city.
The least value of these three values is allowed as tax exemption on your HRA. You can discuss restructuring your pay structure with your employer in order to avail the most of your HRA tax benefit.
Here is a sample illustration for your understanding:
Sunitha earns a basic salary of Rs. 40,000 per month and rents an apartment in Delhi for Rs. 20,000 per month (hence eligible for a 50 per cent of the basic pay for HRA exemption). The actual HRA she receives is Rs. 25,000.
These values are considered to find out her HRA tax exemption:
a. Actual HRA received, i.e. Rs. 25,000,
b. 50 per cent of the basic salary, i.e. Rs. 20,000,
c. Excess of rent paid over 10 per cent of salary, i.e. Rs. 20,000 minusRs. 4,000 is Rs. 16,000
The value considered for her actual HRA exemption will be the least value of the above figures. Hence, the taxable HRA amount for Sunitha per month will be Rs. 25,000 – 16,000 (available HRA deduction) = Rs. 9,000.
5. Can I simultaneously avail tax benefits on my home loan and HRA?
The tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other. As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under income from other sources.
To put some of those queries to rest, here, we discuss the tax exemption that you can claim from your house rent allowance, which is part of the mix.
Here are some answers to general queries about the HRA:
1. How is HRA accounted for in the case of a salaried individual and a self-employed professional?
HRA is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. On the other hand, self-employed professionals cannot be considered for HRA exemption under this act, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under section 80GG, which resembles section to 10 (13A) but is subject to certain conditions.
2. What are the dependent factors in calculating HRA for the salaried individual?
When you are calculating HRA for tax exemption, you take into consideration four aspects, which include salary, HRA received, the actual rent paid and where you reside, i.e. if it is a metro or non-metro city. If these aspects remain constant through the year, then tax exemption is calculated as a whole annually, if this is subject to change, as in a rent hike, pay hike or shift in residence etc., then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.
The place of residence is significant in HRA calculation as the tax exemption for HRA in a metro city is 50 per cent of the basic salary, while that for non-metro cities is 40 per cent of the basic salary. This holds true especially when you work in a metro city, but reside in a non-metro city. In this case, only your city of residence will be considered for calculating your HRA.
3. Can I pay rent to my parents or spouse to avail HRA benefits?
You can pay rent to your parents. But, your parents will then need to account for the same under ’Income from other sources’ and will be entitled to pay tax for the same.
However, you cannot pay rent to your spouse. In view of the relationship when you take up residence together, such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny; so steer clear of these.
4. Do I need to submit any proof for my HRA claim?
You need to submit proof of rent paid through rent receipts, once at the beginning of the year and once towards the end of the financial year. It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, and name of the person who rents it.
4. How do I calculate my HRA?
To figure out how much HRA exemption you are eligible for, consider the following three values:
a. The actual rent allowance that the employer provides you as part of your salary
b. The amount of rent you pay for your house in excess of 10 per cent of your basic pay
c. 50 per cent of your basic salary, when you reside in a metro city or 40 per cent if you reside in a non-metro city.
The least value of these three values is allowed as tax exemption on your HRA. You can discuss restructuring your pay structure with your employer in order to avail the most of your HRA tax benefit.
Here is a sample illustration for your understanding:
Sunitha earns a basic salary of Rs. 40,000 per month and rents an apartment in Delhi for Rs. 20,000 per month (hence eligible for a 50 per cent of the basic pay for HRA exemption). The actual HRA she receives is Rs. 25,000.
These values are considered to find out her HRA tax exemption:
a. Actual HRA received, i.e. Rs. 25,000,
b. 50 per cent of the basic salary, i.e. Rs. 20,000,
c. Excess of rent paid over 10 per cent of salary, i.e. Rs. 20,000 minusRs. 4,000 is Rs. 16,000
The value considered for her actual HRA exemption will be the least value of the above figures. Hence, the taxable HRA amount for Sunitha per month will be Rs. 25,000 – 16,000 (available HRA deduction) = Rs. 9,000.
5. Can I simultaneously avail tax benefits on my home loan and HRA?
The tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other. As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under income from other sources.
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