HRA stands for house rent allowance. It is that component of your salary that covers the expenses incurred on renting a house. The income tax provisions also provide a tax exemption to all the assessees who stay in rented accommodations. The HRA calculator rules help you to compute the amount that you can claim as an exemption. It’s not restricted to just salaried individuals. Self-employed people can also claim tax benefits for rental payments.
If you are a salaried employee, you can claim tax exemption under section 10(13A) of the Income Tax Act (in accordance with Rule 2A of Income Tax Rules). Self-employed people can claim tax benefits under section 80GG. As tax calculations are a bit complex and the provisions change frequently, it is better to use a tool like the online HRA calculator to know the exact amount of benefit that you are eligible to claim.
How to Compute the HRA Exemption?
According to section 10(13A) of the Income Tax Act, the lowest of the following amounts is exempted from tax.
(i) The actual amount of HRA received from the employer
(ii) 50% of your salary if you reside in any of the four metro cities, i.e. Delhi, Mumbai, Kolkata & Chennai. 40% of the salary has to be considered for all other cities
(iii) The actual rent paid in excess of 10% of your salary.
Note: For the purpose of the HRA calculation formula, the definition of Salary = Basic + Dearness Allowance (D.A) + Commission paid as a fixed percentage of turnover
Raj works at an IT MNC in Bangalore. He receives a salary (basic plus DA) of Rs.50,000 per month and a house rent allowance (HRA) of Rs.20,000 per month. He pays a rent of Rs.15,000 per month. The tax exemption on the HRA received by Raj will be calculated as follows.
Actual HRA received by Raj = (20,000*12) = Rs.2,40,000
40% of Salary (basic + DA) = 0.40* (50,000*12) = Rs.2,40,000
Actual Rent (-) 10% of salary = (15,000*12) – 10% * (600,000)
= 180,000 – 60,000 = Rs.1,20,000
In the HRA calculation for income tax, the lowest of the three figures is Rs.1,20,000. So Rs.1,20,000 will be exempted from tax. The balance HRA amount of Rs.1,20,000 (2,40,000 – 1,20,000) will be taxable as income for the year.
40% of the salary is considered in the calculations above as Raj stays in Bangalore (outside the four metro cities)
- Rent receipts have to be produced as proof to claim this tax benefit. HRA exemptions cannot be claimed if rent is not actually paid for the year or any part of it
- The HRA exemption can be claimed only if you are staying in a rented house and paying the rent. You cannot claim this benefit if you reside in your accommodation.
- While using the HRA calculator, please take note of the changes in the salary and the house rent paid during the course of the year. Salary may change due to increments or job changes. The rent may change when you shift houses.
- HRA exemption can also be claimed by paying rent to your parents and producing the relevant rent receipts. But you cannot claim this exemption by claiming that the rent is paid to your spouse.
- The PAN details of the landlord are required if the rent paid exceeds Rs.1 lakh per annum.
Tax Benefits for Self-Employed Individuals
In the case of self-employed individuals who do not receive any salary or salaried individuals who do not receive any HRA, the HRA exemption calculator is not helpful. But such individuals can claim a tax deduction under section 80GG of the Income Tax Act.
As per section 80GG, the least of the following can be claimed as a deduction from taxable income.
(i) Rs.5,000 per month
(ii) 25% of the adjusted total income
(iii) Actual rent paid (-) 10% of adjusted total income
- The adjusted total income (ATI) is calculated as total income minus the long-term capital gain and short-term capital gains under sections 111A, 115A, or 115D and the tax deductions under sections 80C to 80U.
- Only one of the benefits can be claimed. If you have availed the benefit of HRA deduction calculation under section 10(13A), you cannot claim the benefit again under section 80GG
- If you want to claim section 80GG benefits, you cannot claim tax benefits related to any other self-occupied property.
- You can claim the benefits of section 80GG if you stay at your parents’ house, pay rent to them, and the rent is shown as income in their IT returns.
HRA Exemptions & Tax Benefits on Home Loans
If you happen to buy a house on a home loan but reside in another rented house for your requirements & convenience, you can claim both the tax benefits on home loans (section 80C & section 24) and the HRA exemption. If the owned property has been rented out, the rental income should be disclosed in the HRA calculation for tax.
If the rented house is situated in the same city as your property, there should be reasonable cause to prove that the renting is for genuine reasons such as work, ease of commuting, etc.
Recent Budget Amendments
Budget 2020 has introduced a new tax regime that provides more tax slabs and lower tax rates. But under this system, the taxpayer cannot claim any exemption & deduction available in the old regime. So, the HRA exemption cannot be claimed if you choose the new tax regime. But an option has been given to the taxpayers to choose between the two regimes, and they can select the method which results in higher tax savings.
HRA is one of the vital components of your salary structure. The exemption provided on HRA can significantly reduce your tax liability if you incur rental expenses. Please follow the HRA calculator rules to compute the tax savings. Even if you are not in receipt of HRA, you can still claim the tax benefits under section 80GG.