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Salaried individuals who live in a rented house can claim House Rent Allowance (HRA) to lower taxes. This can be partially or completely exempt from taxes. The allowance is for expenses related to rented accommodation. If you don’t live in a rented accommodation, this allowance is fully taxable.

1. How is Tax Exemption From HRA Calculated?

HRA House Rent Allowance

The deduction available is the least of the following amounts:

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

2. Can I Claim HRA and Deduction on Home Loan Interest as well?

Yes, you may claim the allowance as it has no bearing towards your home loan interest deduction. Both can be claimed.

Try out our free HRA calculator to determine your HRA exemption. This calculator shows you on what part of your HRA you have to pay taxes – i.e. how much of your HRA is taxable and how much is exempt from tax.

3. When Do You Need Landlord’s PAN?

If you have taken a house on rent and are making a payment in excess of Rs 1,00,000 annually – remember to obtain the landlord’s PAN or you may lose out on the HRA exemption. Landlords without a PAN must be willing to give you a declaration refer circular No. 8/2013 dated 10 October 2013.

Tenants paying rent to NRI landlords must remember to deduct TDS of 30% before making payment towards rent.

4. What if my Employer Doesn’t Provide me With HRA?

If you are making payments towards rent for any furnished or unfurnished accommodation occupied by you for your own residence, but do not receive HRA from your employer, you can claim deduction under section 80GG.

Conditions that must be fulfilled to claim this deduction –

  • You are self-employed or salaried;
  • You have not received HRA at any time during the year for which you are claiming 80GG;
  • You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession.

In case you own any residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. That other property would be deemed to be let out in order to claim the deduction under section 80GG.

5.Illustration

We can understand the HRA computation better with the following example:

Mr A employed in Delhi, has taken up an accommodation on rent for which he pays a monthly rent of Rs 15,000 during the Financial Year (FY) 2017-18 i.e. Assessment Year(“AY”) 2018-19.. He receives a Basic Salary of Rs 25,000 p.m and DA forming part of salary of Rs 2,000 p.m during the year. He also receives a HRA of Rs 1,00,000 from his employer during the year. Let us understand the component of the HRA that would be exempt from income tax during the FY 2017-18.

Sl No Particulars Amount (in Rs) Amount (in Rs.)
1 Actual HRA received 1,00,000
2 Rent paid (15000 p.m. * 12 months)
minus(-)
10% of {(250 00p.m.*12) + (2000p.m.*12)} i.e.10% of Basic + DA
1,80,000 1,47,600
32,400
3 50% of {(25000p.m.*12) + (2000p.m.*12)}

(50% is considered as the accomodation is in Delhi)

1,62,000
4 Exempt HRA = lowest of 1,2,& 3 1,00,000

Therefore, in the above example, the entire HRA received from the employer is exempt from income tax.

6. How to Claim 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*

*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).

7. How to Claim HRA When Living With Parents?

Let’s understand this with an illustration.

Samiksha works at an MNC in Bangalore. Her company provides her with house rent allowance. But she doesn’t live in a rented accommodation; she lives with her parents instead. How can she make use of this allowance?

Samiksha can pay rent to her parents and claim the allowance provided they own the place they currently live in. All she has to do is enter into a rental agreement with her parents and transfer money to them every month.

This way Samiksha can make a nice gesture and give back to her parents, and two, save some taxes.

But remember: Samiksha’s parents will have to show the rent she paid in their income tax returns. But as a family you will be saving up.

 

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