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House Rent Allowance (HRA) is one of the crucial element in the salary package of the individual. It's a significant benefit provided by employers to cover a portion of an employee's rental expenses for their residence. This article aims to explain the significance and extent of the deduction permissible for HRA.
House Rent Allowance (HRA) is an allowance (part of CTC) given by your employer to help you cover the cost of living in a rented accommodation.
Please note that the tax exemption of house rent allowance is not available in case you choose the new tax regime.
Section 10(13A) of the Income Tax Act allows salaried individuals to claim exemptions for House Rent Allowance (HRA). Rule 2A of the Income Tax Rules prescribes the quantum of exemption admissible. To claim HRA exemption, you must meet the following conditions:
The HRA exemption calculation will depend on various factors like salary, rent paid, HRA received by the employee and city of residence of employee.
The lowest of the following amounts can be claimed as HRA exemption:
Yes, you may claim both HRA exemption and home loan interest deduction.
There can be two situations where you are living in a rented house while owning a house.
The rented house and the owned house are located in the same city
Here, you need to justify the claim of deduction with valid reasons, i.e., why you are not living in your own house. One case may be that the office location is very far from the house you own. This way, you can claim both HRA and Home loan benefits subject to the fulfilment of applicable conditions.
The rented and owned house is located in different cities
Here, you are eligible to claim tax benefits if you had to shift to another city.
If you pay rent but do not receive an HRA from your employer, or you are a self-employed individual, you can still claim the deduction under Section 80GG. Conditions that must be fulfilled to claim this deduction:
Under the provisions of Income Tax Act, you can claim upto 2 properties as self occupied properties. Any other property(s) that is left vacant would be deemed to be let out (notional rent will be taxable even if the property is vacant).
If you own any residential property other than the place where deduction under section 80GG is claimed, you should not claim the benefit of that property as self-occupied. The other property would be deemed to be let out to claim the 80GG deduction.
Click here to know more on Section 80GG.
Mr Anwar, employed in New Delhi, has taken up an accommodation on rent for which he pays Rs.15,000 per month during the Financial Year (FY) 2024-25. He receives a basic salary of Rs.25,000 monthly and DA of Rs.2,000, which forms a part of the salary. He also gets an HRA of Rs.1 lakh from his employer during the year.
Let us understand the HRA component that would be exempt from income tax during FY 2024-25. As per the given data, calculate the following:
HRA would be the lowest of the following:
Therefore, the entire rent amount of Rs.1,80,000 paid by Mr Anwar is not directly exempt. It involves calculations, and the lowest of the three calculated amounts will be exempt from income tax.
Therefore, the entire HRA received from the employer is exempt from income tax.
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. She has to enter into a rental agreement with her parents and transfer money to them every month. Also, Samiksha’s parents need to report the rent paid by their daughter as their income in their income tax return. They can save tax on the family income if their other income is below the basic exemption limit or taxable at a lower tax slab.
Things that are necessary in this arrangement
Click here to read more about claiming HRA when living with parents.
Also read about:
Basic Salary
UAN Login
Last Date to File ITR
Section 115BAC of Income Tax Act
Income Tax Deductions List
How to e verify ITR
Annual Information Statement (AIS)
Section 80D
Home Loan Tax Benefit
Leave Travel Allowance