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HRA-House Rent Allowance: Exemption Rules

House Rent Allowance is a component of the Income under the head Salary provided by the employer to the employee for rented accommodation. Its primary use is to help employees with tax benefits towards the payment for accommodations every year. HRA comes under Section 10(13A) of the Income Tax Act, 1961, and the exemption can be claimed partially or fully.

The Union Budget 2020 introduced the new tax regime. It provided the individuals with an option to choose either the old tax regime with exemptions or the new tax regime without certain exemptions. So, the tax benefit of house rent allowance will be availed only by the individuals opting for the old tax regime.

How is Tax Exemption From HRA Calculated?

House Rent Allowance {Sec. 10(13A) and rule 2A} – Exemption in respect of house rent allowance is regulated by rule 2A. It Is based upon the followings_

  • Actual HRA received,
  • 50% of (basic salary +DA) for those living in metro cities (40% for non-metros), or 
  • Actual rent paid less 10% of basic salary + DA.

Amount exempt from tax – the least of the above three is exempt from tax.

Other Point should also kept in view_

What is “Salary” – “salary” for this purpose means basic salary and includes dearness allowance if terms of employment so provide. It also includes commission based on fixed percentage of turnover achieved by an employee as per terms of contract of employment – But it dose not include any other allowance and perquisite. 

When exemption is not available– Exemption is denied where an employee lives in his own house, or in a house for which he not pay any rent or pays rent which dose not exceed 10% of salary.

Mode of computation of exemption– The amount of exemption in respect of house rent allowance received by an employee depends upon the followings-

  • “Salary” of the employee,
  • House rent allowance,
  • Rent paid, and 
  • The place where house is taken on rent.

When these four are same throughout the previous year, the exemption should be calculated on “annual” basis. when, however there is a change in respect of any of the aforesaid factors, then the exemption shall be worked out on “monthly” basis.

Special Cases to Claim HRA Benefit

1. If rent is paid to a family member

The rented premises must not be owned by the person claiming the tax exemption. So if you stay with your parents and  pay rent to them then you can claim that for tax deduction as HRA. However, you cannot pay rent to your spouse. As, in the view of the relationship, you are supposed to take the accommodation together. thus, these transaction can invite the scrutiny from the Income -tax Department.

Even if you are renting the house from parents, make sure you have documentary evidence as proof that financial transaction regarding your tenancy takes place between you and your parents. so keep a record of banking transactions and rent receipts because your claim can get rejected by the tax department if they are not convinced by the authenticity of the transactions. 

2. Own a house but living in a different city

If an individual is working in a different city, he can claim the tax benefit for interest paid on the home loan and HRA for the rented accommodation provided he has the relevant documents to back his claim.

Deduction in respect of Rent Paid(Sec.80GG)

Individuals who don’t get HRA but pay rent_

There may be some employees who might not have HRA computed in their salary structure. Also. a non-salaried individual might be paying rent. For them, Section 80GG of the Income-tax Act offer help.

An individual who pays rent for a residential accommodation for himself (and Family) can avail deduction under section 80GG provided he gives a declaration electronically in Form No. 10BA.

Can a Person who pays rent to avail this deduction own a house-

The following persons should not own any residential accommodation at the place where the taxpayer resides, performs the duties of his office, or employment or carries on his business or profession_

  • The taxpayers,
  • His/her Spouse,
  • His/her minor child (including minor step child and minor adopted child), and 
  • The Hindu undivided family of which the taxpayer is a member.

If the taxpayer owns a resident accommodation at a place other then the place noted above, then in respect of that house the concession in respect of self-occupied property is not claimed by him.

What is amount of deduction-

The amount deduction under section 80GG is the least of the following-

  • Rs.5,000 per month,
  • 25% of “total income” or
  • The excess of actual rent paid over 10% of “total income” 

“Total Income”, for this purpose, is gross total income minus Log-term capital gains, short-term capital gains under section 111A, deductions under section 80C to 80U (not being section 80GG) and income under section 115A. 

Disclaimer:- “All the information given is from credible and authentic resources and has been published after moderation. Any change in detail or information other than fact must be considered a human error.”

Dheeraj Kumar Singh

FAQ on HRA

Yes, you may claim the HRA as it has no bearing towards your home loan interest deduction. Both can be claimed. Try out our free HRA calculator to determine your HRA exemption. This calculator shows you on what part of your HRA you have to pay taxes – i.e. how much of your HRA is taxable and how much is exempt from tax.
If you have taken a house on rent and are making a payment in excess of Rs 1 lakh annually – remember to provide the landlord’s PAN. Else, you may lose out on the HRA exemption. Landlords without a PAN must be willing to give you a declaration refer circular No. 8/2013 dated 10 October 2013. Tenants paying rent to NRI landlords must remember to deduct TDS of 30% before making the payment towards rent.
Let’s understand this with an example. Samiksha works in an MNC in Bangalore. Though her company provides her with HRA, she lives with her parents in their house and not in rented accommodation. How can she make use of this allowance? Samiksha can pay rent to her parents and claim the allowance provided. All she has to do is enter into a rental agreement with her parents and transfer money to them every month. This way Samiksha can make a nice gesture to her parents while saving on taxes.Her parents will have to show the rent she paid on their income tax returns. However, they can save a lot as a family.
The good news is that HRA can be claimed directly on your income tax returns. If you forgot to submit rent receipts to your company HR at the time of proof submission, you can claim HRA later on when you file your IT Return. To claim this, adjust your taxable income to include HRA and calculate tax is payable on the lowered taxable income. You will then be able to claim a refund if tax has been deducted in excess.
No, you cannot enjoy the tax benefits of HRA if you live in your own house. One cannot pay rent to oneself. Hence, no exemption is available for HRA and the whole of HRA received becomes taxable under “Income from Salary”. But if you reside in a rented property, then you can claim exemption even if you own a house (in the same city or in a different city).
Normally, Tax benefit of HRA cannot be claimed by paying rent to your spouse. So, if you are staying in a house owned by your spouse then HRA exemptions are not available to you. However, if you still wish to claim exemption, you should be ready for litigation as Income Tax Officer might have different view.
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