What is HRA (House Rent Allowance)?
HRA or the House Rent Allowance is an amount paid by employers to employees as a part of their salaries. It provides employees with tax benefits for what they pay towards accommodations every year. The decision of how much HRA needs to be paid to the employee is made by the employer based on certain criteria like the salary and the city of residence. The house rent allowance is regulated by the provisions of Section 10(13A) of the IT Act.
House rent allowance benefits are only available to salaried individuals. Self-employed individuals are exempt from claiming HRA. This exemption is also available only if the employee is living in rented accommodations. In case the employee lives in his/her own house and does not pay any rent, he/she cannot claim HRA.
In case the employee is living in a rented accommodation and the rent paid exceeds Rs.1 lakh in one financial year then the PAN details of the landlord need to be submitted along with the HRA claims.
How is HRA Decided?
HRA is actually decided based on the salary. There are some other factors that affect it which could include things like the city in which the employee resides. If the place of residence is a metro city then employees are entitled to an HRA equal to 50% of the salary. For all others cities the entitlement is 40% of the salary.
For the purpose of calculating the HRA, the salary is defined as the sum of the basic salary , dearness allowances and any other commissions. If the employee is not receiving a dearness allowance or commissions then the HRA will be 50%/40% of the basic salary.
The actual HRA offered will be the lowest of the following three provisions:
- The amount received as the HRA from the employer.
- Actual rent paid less 10% of the basic salary.
- 50% of the basic salary if staying in a metro city and 40% in a non-metro city.
How to Calculate HRA
To understand how to calculate HRA let us return to the example of Ravi Bajaj. He stays in Mumbai and pays a rent of Rs. 10,000 per month. His payslip is shown below.
Example Payslip:
| Employee No – 1234 | Name – Ravi Bajaj | ||
| Joining Date – 21/12/2012 | PF No – SB/AYE/1234567/123/1234567 | ||
| BASIC | 30,000 | PF | 2,000 |
| HRA | 13,000 | PROFESSIONAL TAX | 200 |
| CONVEYANCE | 2,000 | ||
| SPECIAL ALLOWANCE | 3,000 | ||
| MEDICAL | 1,250 | ||
| LTA | 5,000 | ||
| Total Earnings | 54,250 |
For calculating Ravi’s HRA that is exempt from income tax we have:
Salary – Rs. 30,000 per month (the basic salary will be considered in this case since there is no commission or dearness allowance) HRA provided by company – Rs. 13,000 per month 10% of basic salary (10% of annual basic salary) – Rs. 36,000
Now we calculate the three scenarios:
- Amount received as HRA from employer = Rs. 13,000 X 12(months) = Rs. 1,56,000
- Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
- 50% of basic salary since he lives in a metro = Rs. 1,80,000
In the case of Ravi, it is evident that the HRA amount which will be exempt from tax will be Rs. 84,000 because that is the amount that is the least of the three scenarios.
Benefits of HRA
The biggest benefit of the house rent allowance is that it provides for an avenue to reduce the taxable income , which in turn leads to a reduction in the tax that you have to pay.
FAQ
Frequently asked questions about house rent allowance.
- Can anyone claim HRA?No, not everyone can claim HRA. House rent allowance is afforded to those who are living in rented accommodations. It is not applicable for self-employed individuals and those who live in their own houses.
- Can I claim HRA if I live in my own house?No. If you live in your own house you cannot claim HRA.
- Can I claim HRA and deduction on home loan interests?There may be a situation where you own a house but still choose to stay in a rented accommodation because it happens to be closer to your office or because your place of work is in another city. In such a situation you can claim house rent allowance and exemptions on the home loan interest at the same time.
- When do I have to provide the PAN information of my landlord?If the annual rent paid by you exceeds Rs. 100,000 in one financial year, the landlord’s PAN details need to be provided.
- Do I have to produce rent receipts while claiming HRA?If the rent paid every month is up to or less than Rs. 3,000 then rent receipts need not be provided. If the monthly rent does exceed Rs. 3,000 then rent receipts will be needed.
- I live in a house owned by my spouse and pay rent to my spouse. Can I claim HRA?
Technically there is nothing illegal about paying rent to a spouse as long as they, the spouse, show it as an income and declares it. There must also be a record of this transactions because if the IT departments decides to take a closer look at your case and finds discrepancies, it might lead to trouble.