What is House Rent Allowance: HRA Exemption, Tax Deduction, Rules & Regulations

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.

Key Takeaways 

Broadly speaking, the following is the summary of significant points in this article.

• House Rent Allowance (HRA) is a part of salary of an employee.
• HRA tax benefits are available for employed tax payers under section 10(13A) and for self-employed tax payers, under section 80GG.
  • For salaried individuals - Actual rent received, Rent received minus 10% of basic pay, 40/50% of basic pay  - the least of the following is exempt.
  • For self employed individuals - 25% of total income, rent paid minus 10% of total income , Rs.5,000 per month -  the least of the following is exempt.

• Possession of necessary documents is mandatory for claiming HRA exemption.
• HRA can also be claimed while living in parent's home on entering into formal rental agreement, but the rent amount should be included in parent's total income.

What is HRA (House Rent Allowance)?

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. 

Is HRA Always Exempt?

• Not all the HRA you received is always exempt from income tax. HRA is a part of your salary income and therefore, it is initially considered as your taxable income.
• However, you can claim a tax exemption either – partially or wholly under Section 10(13A) of the Income Tax Act. This is popularly known as HRA exemption. 
• If you live in your own property(not living in rentals), this allowance is fully taxable.

Please note that the tax exemption of house rent allowance is not available in case you choose the new tax regime. 

Who can Claim HRA Tax Benefits?

It is usually perceived that only salaried class can enjoy the tax benefits related to HRA. But any individual can avail tax benefits related to HRA. 

For Salaried Individuals who Receive HRA

• Exemption is allowed under section 10(13A) for salaried employees who receive HRA.  
• HRA calculated under this section is not included in salary of the taxpayer.

For Other Individuals

• Deduction under section 80GG is available for salaried employees who do not receive HRA and people who do not have salary income.
• This deduction is reduced from gross total income. 
• So, the way in which income is computed for section 10(13A) exemption and section 80GG deduction is not similar. It has some minor differences.

This article primarily focuses on HRA exemption for salaried employees.

Conditions for Claiming HRA Exemption u/s 10(13A)

To claim HRA exemption, you must meet the following conditions:

For Salaried Individuals who Receive HRA

• Live in rented accommodation.
• Receive HRA as part of your CTC
• Submit valid rent receipts and proof of rent payments.

The HRA exemption calculation will depend on various factors like salary, rent paid, HRA received by the employee and city of residence of employee.

For Other Individuals

• The property in which the tax payer normally lives should not be owned by himself, or his spouse or minor child. If so, deduction under this section cannot be claimed. 
• If the assessee is a member of HUF, the house should not be owned by any other member of HUF. 
• He should not have received HRA during the financial year. 

He can be a salaried individual who has not received HRA during the year, or a self-employed person.

How to Calculate HRA Exemption?

For Salaried Individuals who Receive HRA

The lowest of the following amounts can be claimed as HRA exemption u/s 10(13A):

• Actual HRA received 
• 50% of [basic salary + DA] for those living in metro cities (Delhi, Kolkata, Mumbai or Chennai)
• 40% of [basic salary + DA] for those living in non-metros
• Actual rent paid (-) 10% of [basic salary + DA]

Illustration

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:

• HRA received – Rs.1 lakh
• 50% of basic salary and DA – Rs.1,62,000 (50%*(Rs 25,000+Rs 2,000)*12 months)
• Rent paid minus 10% of salary- Rs.1,47,600 

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.

For Other Individuals

The lowest of the following is exempt u/s 80GG:

1. 25% of total income (after claiming all deductions but before claiming deduction under this section).
2. Rs.5,000 per month
3. Rent paid minus 10% of total income (after claiming all deductions but before claiming deduction under this section).

HRA Calculator

Documents Required to Claim HRA

The following are the important documents required to claim HRA. There is no necessity to submit all the supporting documents along with the income tax return. But for submission of proofs to the employer, and to respond to the department in case of any notices, the following documentation is recommended.

• Rent Receipts
• Rental Agreement
• Form 12BB
• Bank payment proof for rent
• Salary slip where HRA is incorporated
• PAN of landlord - if the rent exceeds Rs.1 Lakh per annum. Else, you may lose out on the HRA exemption.

Landlords without a PAN must sign a self declaration stating he does not have a PAN, as per circular No. 8/2013 dated 10 October 2013.

Can I Claim HRA and Deduction on Home Loan Interest?

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. 

Rented House and the Own 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.

How to Claim HRA When Living With Parents?

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

• Rental agreement 
• Transfer of rent amount, preferably via bank transfer
• Reporting of rental income by their parents by filing an income tax return.

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