House Rent Allowance(HRA) is part and parcel of the salary for the salaried individuals. HRA, unlike the basic salary, is partially taxable in the hands of the employees. Subject to certain conditions, HRA can help you reduce your taxable income and pay reduced income taxes.
A part of your HRA is exempt under section 10(13A) of the Income Tax Act, 1961. The employer reduces the exempted portion from your taxable salary while calculating your income taxes. But, do keep in mind that if you are living in your own house or you are not paying any rent, then the HRA received will be fully taxable.
Eligibility To Claim HRA
Salaried individuals having an HRA component and staying in rented accommodation can only claim the tax benefit. Self-employed individuals are not eligible to avail the HRA deduction.
The benefit will be restricted for the period only in which you have occupied a rented house. The deduction will be the least of the following:
Amount of Exemption Actual HRA received. 50 percent of the salary* in metro cities or 40 percent in the case of non-metro cities. Rent paid in excess of 10 percent of the salary*. *Basic salary is considered for above calculation purposes. If you receive “Dearness Allowance (DA) - if it forms the part of retirement benefits' and “commission based on the turnover', then these two are also added to the “salary' for exempt HRA calculation. Documents Required To Avail HRA Benefit
You can avail the HRA benefit on the submission of rent receipts, signed by the house owner, to your employer.
In addition to the rent receipts, you will also have to provide the PAN of the house owner if the rent paid during the year is more than Rs 1 lakh.
Special Scenarios Under HRA Paying rent to your family members
For availing the tax benefit of HRA, you must not own the house. If you are staying in the property owned by your parents and paying rent to them, then you can claim the HRA deductions.
However, you cannot pay rent to your spouse. Hence, claiming any deductions on the same can invite scrutiny from the income tax department.
Make sure that the financial transactions related to the occupancy happen between you and your parents and you have documented those to claim HRA exemption. You have to submit the rent receipts issued by your parents to your employer for claiming the exemptions. Also, your parents will have to report rental income in their tax returns.
Pays rent, but HRA is not the part of the salary
There are chances that a salaried individual does not have HRA as a part of his salary structure. Also, self-employed individuals might be staying in rented accommodation. Income Tax Act provides relief to those individuals through section 80GG.
An individual staying in a rented property, not having HRA as a part of his salary, can claim the deduction of the rent paid by him under section 80GG.Deduction amount will be the least of the following under section 80GG:
Rent paid in excess of 10 percent of total income*. 25 percent of the total income*. Rs 5,000 per month. *Total income is the net income calculated after deducting the following from the gross total income: Long-term capital gains. Short-term capital gains where the Securities Transaction Tax (STT) is paid. Deductions available under sections 80C to 80U, except section 80GG. Owner of a house but stays in a different city
Many times you may have to live on rent in a city different from where you own property due to your job. In such a case you will be eligible to claim HRA deduction for the rented accommodation.
Along with this deduction, you may also be able to claim the interest paid and principal repayment on your home loan for the owned property if any. This benefit is not available in case of section 80GG.
Archit Gupta is founder and CEO of ClearTax.