House Rent Allowance | Meaning and Definition

What is a House rent allowance?

House rent allowance (HRA) is the allowance you receive from your employer or organization towards the rent of your house. It forms part of your salary.

HRA depends on your salary, city of residence, company’s salary structure, etc. Generally HRA is a fixed percentage of your basic salary. You can claim a tax exemption on your HRA under Rule 2A of Income Tax, 1961.

The calculation of HRA is influenced by multiple factors which are as-

Salary
Rent paid
HRA received by the employee
City of residence

HRA for self-employed individuals

Self-employed people can also claim deductions and exemptions towards House Rent Allowance (HRA). They can claim a deduction under Section 80GG of Income tax.

HRA for salaried employees

Salaried employees can claim exemptions under Section 10 (13A), rule 2A of the Income Tax Act. The House rent allowance is part of an individual’s salary, so it should be claimed using a defined procedure.

HRA Calculation

The deduction available is at least of the following amounts.

Actual HRA received from the employer
50% of (Basic salary+ Dearness Allowance) for those living in metro cities (Delhi, Gurgaon, Kolkata, Mumbai or Chennai)
40% of (Basic salary+ Dearness Allowance) for those living in non-metro cities.
Actual rent paid (-) 10% of (Basic salary+ Dearness Allowance)

How is HRA taxed?

If the payment of rental expenses is more than one lakh rupees it is mandatory to provide the PAN details of the landlord while filing the income tax returns.

Let us understand the HRA component by taking a simple illustration of a salaried employee.

Mr. A employed in Delhi has taken accommodation on rent for which he pays 30000 Rs per month as rental. He receives a basic salary of 50000-/ and a dearness allowance of 8000-/ monthly which is also a part of his salary. He receives an HRA of 1,20,000 throughout the year.

S. No Particulars Amount

1. Actual HRA received 1,20,000

2. 50% of (50000+8000)*12 3,48,000
3. Actual rent of 3,60,000- 10% of(50000+8000)*12 2,90,400
4. HRA deduction= Least of (1,2,3) 1,00,000

Eligibility criteria to claim a tax deduction on HRA

House rent allowance is eligible for HRA deduction under Section 10(13A) of the Income Tax Act if an individual meets the following criteria.

The person claiming HRA is a salaried or a self-employed individual
The person must be living in a rental property or paying some house rentals. HRA exemption cannot be claimed by those individuals who are living in their own house.
You should be able to produce a proof of rent paid such as a valid house receipt.
This means you cannot claim HRA deduction until or unless you are paying rent even if the company is providing you house rent allowance

HRA Taxation Rule in India

HRA exemption rule states that HRA deduction is allowed for only those individuals who are either salaried or self-employed and living in a rental accommodation. It means even if you are getting HRA from your employer and you are not living in a rented property your entire amount for house rent allowance is taxable under Income Tax Act.

Taking the above example of Mr. A if he was not paying rent his entire amount of 1,20,000 would be taxable under his applicable income tax slab.

For self-employed individuals who didn’t receive any HRA amount, the HRA rule allows the benefit of claiming HRA exemption under 80GG.

Therefore, while calculating HRA exemption, it is important to understand whether you claim HRA deduction under Section 10(13A) or Section 80GG.

Tax Benefits of HRA

HRA deduction under Section 10(13A) has the following benefits:

The biggest advantage that HRA offers is reduction of total taxable income.
You can also claim deduction in HRA even if you are living in your parents home by showing the valid proof of rent receipt.
You can also claim HRA tax benefit even while paying EMI for home loan as long as your house is not located in the city of your employment. If the residence is in the same city you will need to produce a valid explanation as to why you cannot live there.

How to claim deduction even if you didn’t receive HRA?

Self-employed and salaried employees cannot claim deduction under Section 10(13A) . However they can still avail the benefit under Section 80GG of the Income tax.

Under Section 80GG, an individual can claim deduction in least of the following

5000 per month that is 60000 per year
25% of Gross total income
Actual rent paid- 10% of Gross Total Income

Documents Required for House Rent Allowance Exemption

HRA exemption is a provision in the Income Tax Act that allows employees to deduct tax from their total salary.

In order to claim this exemption certain documents are necessary.

Documents required to get House Rent Allowance Deduction are:

Information about the PAN card of the house owner and the other details
If the rental expense is more than 1 lakh you have to submit the photocopy of owner’s PAN card
Identity proofs of both house owner and the tenant
Address of the rental property
Proof of residence in India such as rent receipt or utility bill copy within one month of submitting the application

Along with these documents you might also be asked to submit some additional documents based on your job profile, income and the duration for which you have rented the apartment.

Conclusion

The HRA is a tax deduction available to employees and self employed individuals in India. The employee will deduct the amount of HRA from their salary and pay it directly to the employee upon his entitlement.

HRA Exemption Calculation is important to determine how much of your income is exempted from income tax. You can follow a series of steps to calculate that. Various software can be used to calculate HRA.