HRA Exemption

How to calculate House Rent Allowance (HRA) – HRA Exemption and Taxability

What is House Rent Allowance (HRA) ?

House Rent Allowance (HRA) is available to person deriving income from salary. It is a part of salary given to employee by his/her employer for rent accommodation. All those salaried persons who are receiving house rent allowance and living in rented accommodation can claim full or partial HRA exemption under section 10(13A) of the Income Tax Act, 1961.  However, HRA exemption u/s 10(13A) is not available if you are living on your own house or do not incur any expenditure on rent.

Calculation of HRA Exemption

HRA exemption will be least of the following:

  • 50% of Salary where residential house is in Mumbai, Kolkata, Delhi or Chennai [40% for any other place]
  • Actual HRA received 
  • Actual Rent minus 10% of Salary

Salary here includes basic salary, dearness allowance and commission, if any, based on fixed percentage of turnover.

You can use our calculator to calculate HRA exemption. [HRA Calculator]

You can save tax in advance if you give details of the above calculation in advance to your employer. 

Illustration

Lets us understand the HRA calculation with the help of an example.

Mrs. Aarya is working in MNC at Mumbai as a Chartered Accountant and is drawing Salary of ₹ 1,00,000 per month. She is getting House Rent Allowance of ₹ 12,000 per month, though actual rent paid by her is ₹ 11,000 per month. How much is the HRA exemption?

Solution: As discussed above, HRA exemption will be least of the following:

1. 50% of [₹ 1,00,000 x 12] = ₹  6,00,000

2. Actual HRA received [ ₹ 12,000 x 12] = ₹ 1,44,000

3. Actual Rent paid [₹ 11,000 x 12]  minus [10% of (₹1,00,000 x 12)] = ₹ [1,32,000 – 1,20,000] = ₹ 12,000 

The least of the above is ₹ 12,000. Therefore, HRA exemption available to Mrs. Arya will be ₹ 12,000. In other words, taxable HRA will be [₹ 1,44,000 – ₹ 12,000] = ₹ 1,32,000.

Issues faced while calculating HRA

 1. How do I claim HRA exemption?

To claim HRA exemption you need to live on rental accommodation. You should have rental receipts of rent paid or rent agreement with the landlord. Also, if the total annual rent paid exceed ₹ 1,00,000 i.e. ₹ 8,333 per month, then you have to obtain the PAN of landlord. If your landlord doesn’t have PAN, then declaration must be taken from the landlord.

2. Paying Rent to my family members.

HRA exemption is also available if you are paying rent to your close relative, other than your wife. You can pay rent to your parents and claim the exemption. But it should be kept in mind that same will be taxable as Income from House Property as your parents income. Futher, documentary proof (agreement, bank statements etc.) of such transactions should be kept. However, you cannot pay rent to your wife. It is expected that husband and wife should live together except under special circumstances. Such planning should be avoided as it may attract scrutiny assessment.

3. Residing in rented premises but own a house

If you are residing on a rented property, you can claim the HRA exemption even if you own a house (in the same city or different city). It can be possible that due to employment reasons or convenience reasons, you are not residing in your own house.

If the house owned by the you is let out, then entire deduction of interest is available under section 24(b). It is also possible that house owned by you is used by your family members or is vacant for some reasons, then interest deduction under section 24(b) will be limited to ₹ 2,00,000. Therefore, an employee can simultaneously take the benefit of section 10(13A) and section 24(b).

4. Not receiving HRA

It is possible that you are not receiving any HRA from your employer. In such cases, you can claim deduction of the rent paid under section 80GG of the Income Tax Act, 1961 by furnishing form 10B.

Amount of deduction:

The least of the following amount can be claimed as deduction under section 80GG:

  • Rent paid minus 10% of total income
  • 25% of the adjusted total income of the employer
  • ₹ 5,000 per month or ₹ 60,000 annually

Note: It is the tendency of some people to use fake rent receipts to save income tax even though no rent is paid. It is advised not to resort to such practices as it may lead to penalty and other financial costs.

Pratik Gelda

I'm a qualified Chartered Accountant and I love to write about economics, finance, taxation and investments. My aim is to make my readers economically literate and financially independent

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