You may be receiving the House Rent Allowance (HRA) as a part of your salary package. If you receive HRA and pays rent then there is an HRA exemption that you can claim to save taxes. Refer this article to know about 5 most important points about HRA Deduction. 

#1 HRA is Not Always Fully Deductible 

The HRA (House Rent Allowance) allowance you receive from your employer is not always fully tax-exempt. It may be fully or partially exempt from tax depending on certain conditions.

Out of the HRA received, the least of the following three amounts is taken to be exempt from tax. The remainder of your balance from HRA is added back to your taxable salary.

1. HRA received from your employer
2. Actual rent paid less 10% of Salary*
3. 50% of Salary* for those living in metro cities** (40% for non-metro cities)

*Salary for this purpose means basic salary, dearness allowance if provided in terms of employment and commission as a fixed percentage of turnover.

**Metro cities for HRA purposes refer to Delhi, Mumbai, Kolkata, and Chennai.  

So, if your rent payment is less than 10% of Salary, there will be no exemption on the HRA and the whole amount will be taxable.

In case you opt for new-tax regime, no exemption will be available to you and the whole of the amount received as HRA will be taxable. HRA deduction is available only under the old tax regime. 

Try out our free HRA calculator here.

#2 You can Claim HRA by Paying Rent to your Parents

If you don’t live in a rented accommodation but live with your parents, and your employer provides you HRA, you can still take benefit of this allowance. For this though, 

• Your parents must be owners of the property you live in 
• You must pay the rent to your parents
• Your parents must show this in their income tax return as rental income. 
• The maximum exemption will still be based on the above limits mentioned in point 1.

Read more on claiming HRA by paying rent to your parents.

#3 HRA can be Claimed Directly in your Income Tax Return

Forgot to submit the rent receipts to your employer at the time of proof submission? Well, you can still claim exemption on HRA while filing your income tax return. Adjust your taxable income to include the benefit from HRA. If tax has been deducted by your employer in excess, you can always claim a refund of the same.

#4 Compulsory to Submit Landlord’s PAN

It is compulsory to submit the PAN of the landlord if the rent payment exceeds Rs.8,333 per month. A new notification from the Income Tax Department requires all tenants who pay rent exceeding Rs.1,00,000 per year to mention the PAN of their landlord compulsorily in the tax return. This is to deter landlords from hiding rental income and to deter employees from claiming excess rent as a deduction rather than the actual payment. Read more on this.

#5 HRA along with Interest on Home Loan

Homeowners paying back interest on their home loan and getting HRA as part of their salary can avail both the house property-related tax benefits i.e., 

(i) Can claim the interest deduction on home loan under the House Property head and 

(ii) Claim HRA exemption on rent payments to lower their taxable income. 

However, there are certain conditions to be fulfilled to claim the dual benefit. Want to know about other allowances that are part of your payslip. Read more on our Salary guide.

Note: If you are living on rent and do not receive HRA as a part of your salary, then you can claim a similar deduction under Section 80GG.

Final Word

House Rent Allowance is one of the most important allowances that almost every employee receives. Claiming proper exemption in compliance with the tax provisions is necessary to avoid any scrutiny from the tax department. This will also help the taxpayer to save tax. However, HRA exemption can only be claimed if the taxpayer opt to file tax under the old tax regime.