House Rent Allowance (HRA) is a wage component provided by an employer who lives in leased housing. HRA allows employees to minimize their taxable income and save money on taxes. However, not everyone is eligible to claim the whole amount of HRA as a tax deduction. To get the benefits of HRA, several regulations and requirements must be met.
What is HRA, and How Does It Work?
HRA is computed as a proportion of the employee’s base wage. The proportion may vary based on the employee’s grade, place of residence, and company policy. Usually, the HRA ranges from 10% to 50% of the basic salary.
The actual amount of HRA received by the employee is shown in the salary slip or Form 16 issued by the employer.
How Much of HRA is Exempt from Tax?
The entire amount of HRA the employee receives is not exempt from tax. The tax exemption on HRA is based on the least of the following three factors:
● Actual HRA received by the employee in a financial year
● Actual employee rent paid less than 10% of the basic income
● 50% of the basic income if the employee resides in a metro city (Delhi, Mumbai, Kolkata, or Chennai), or 40% if the person lives in a non-metro city.
Suppose Mr. Rajesh lives in Mumbai and pays a monthly rent of Rs. 20,000. His basic salary is Rs. 50,000 per month, and he receives an HRA of Rs. 25,000. His annual HRA exemption will be calculated as follows:
|Actual HRA received||Rs. 3,00,000 (Rs. 25,000 x 12)|
|Actual rent paid minus 10% of basic salary||Rs. 1,80,000 [(Rs. 20,000 x 12) – (10% x Rs. 6,00,000)]|
|50% of the basic salary||Rs. 3,00,000 (50% x Rs. 6,00,000)|
The last of the above three factors is Rs. 1,80,000. Therefore, Mr. Rajesh can claim a tax exemption of Rs. 1,80,000 on his HRA, and the remaining Rs. 1,20,000 will be added to his taxable income.
What are the Conditions to Claim HRA Exemption?
To guarantee HRA exemption, the representative should satisfy the following accompanying circumstances:
● The employee must live in rented accommodation and pay rent to the landlord.
● The employee must not own any residential property at the place where they reside or work.
● The employee must submit rent receipts or rent agreements as proof of rent payment to the employer or the income tax department.
● The employee must provide the PAN of the landlord if the annual rent exceeds Rs. 1 lakh.
● The employee must deduct TDS at 30% if the landlord is a non-resident Indian (NRI)
What are the Benefits of HRA?
HRA has several benefits for both the employer and the employee. Some of them are:
● HRA reduces the taxable income of the employee and helps them save e filing of income tax return.
● HRA provides flexibility to the employee to choose their place of residence according to their convenience and budget.
● HRA allows the employee to claim both HRA exemption and home loan interest deduction if they own a house at another location.
● HRA does not affect the employer’s tax liability as it is an allowable business expense.
How to Claim HRA While ITR Tax Filing?
If an employee needs to submit rent receipts or rent agreements to their employer at the time of proof submission, they can still claim HRA exemption while ITR tax filing online.
To claim HRA exemption online, they need to follow these steps:
● Log in to their e-filing account on the income tax website
● Choose ‘Prepare and submit online ITR.’
● Select ‘ITR-1’ or ‘ITR-2’ depending on their income sources
● Fill in their personal and income details
● Under ‘Income from Salary,’ enter their gross salary and deduct their exempted HRA amount
● Under ‘Deductions,’ enter their other eligible deductions such as Section 80C, Section 80D etc.
● Verify and submit their ITR
HRA is an important component of salary that can help employees save taxes on their rent payments. However, they must follow the rules and conditions the income tax law laid down to claim HRA exemption correctly and avoid any penalties or notices. By leveraging the provisions provided by the Income Tax Act, individuals can claim exemptions on their HRA and reduce their taxable income. To avail of these benefits, it is important to meet certain eligibility criteria, such as receiving HRA as a part of the salary and paying rent for a residential accommodation.