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House Rent Allowance (HRA)

House Rent Allowance (HRA) is one of the essential feature of any individual's salary. The total amount allotted by the employer towards the employee's accommodation as rent is known as HRA.

The amount allotted for HRA is beneficial for an employee as it is calculated for tax deductions for a given financial year, helping in reducing the taxable income. However,the tax benefits associated with HRA are only applicable for those salaried individuals who stay in a rental accommodation. If an employee stays in his or her own house, he or she is not eligible to claim the amount for tax deductions.

Calculation of HRA is based on a number of factors, which are enlisted as follows:-

·         The actual rent that is paid should be less than 10% of the basic salary.

·         In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a a non-metro city.

·         The actual amount allotted by the employer as the HRA.

The least of the aforementioned amount will be considered for tax deduction from HRA.

Claiming Rules for HRA:-

·       Allotted HRA cannot exceed more than 50% of basic salary

·       As a salaried employee, one cannot claim for the full rental amount payable.

·       Avail tax benefits of HRA along with a home loan.

·       In a case you where the assesse stays with his/her with parents is eligible to pay rent to parents and collect a receipt for            HRA claim. However, similar rules don’t allow when onepays rent to spouse and claim a tax exemption.

·       If the annual rent of accommodation exceeds Rs.1,00,000, then presenting the landlord’s PAN card is mandatory. Also, in          case the landlord does not have a PAN card, he/she can provide a self-declaration.

·       In case landlord is an NRI, one must deduct 30% tax from the rent amount that needs to be declared.

Claiming HRA as Deduction Under Section 80GG

The least  of the will be considered as the deduction under this section:

·       Rs.5,000 per month

·       25% of adjusted total income

·       Actual Rent less 10% of adjusted total Income

Where Adjusted Total Income means Total Income Less long-term capital gain, short-term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U (except deduction under section 80GG).

Illustration for HRA Calculation:-

An individual, with a monthly basic salary of Rs.15,000, receives HRA of Rs.7,000 and pays Rs.8,400 rent for an accommodation in a metro city. The tax rate applicable to the individual is 20% of his income.

To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:

i)                  Actual HRA received = Rs.84,000

ii)               50% of salary (metro city) = Rs.90,000 (50% of Rs.1,80,000)

iii)             Excess of rent paid annually over 10% of annual salary = Rs.82,800 (Rs.1,00,800 – (10% of Rs.1,80,000))

It depicts that of Rs.84,000 actually received as HRA, Rs.82,800 gets tax exemption and only the balance of Rs.1,200 gets added to the employee’s income, on which a tax of Rs.240 (20% slab) gets payable.

At Tax Avatar, we help to enunciate the nuances and help you to maximize your tax savings. We cater to your needs in order to reduce your tax liabilities and makeup your self wealth. House Rent Allowance is one of the key tool that will decrease the taxation dues, if used wisely. Register today for free and make a difference. We would be more than happy to guide you in the best possible manner.