House rent allowance (HRA) is the housing benefit provided by the employer as a part of the employee’s salary. If a person gets housing allowance and he or she lives in a rented accommodation then he or she can claim for tax exemption on the housing allowance under section 10 (13A) of the Income tax act. An employer can make partial payment or full payment of the house rent.
Further, this allowance is available only for people living in a rented accommodation. In case a person is not living in a rented houses, then the entire housing allowances provided by the employer is taxable.
Eligibility for HRA Tax Exemption
- The amount of house rent allowance that will be provided depends upon the residential area of the person. If a person stays in a rural area then 40% of the house rent will be provided. However, if he or she stays in an urban area then 50% will be provided.
- If the rent paid is more than one lakh/ annum then the PAN card of the landlord is must.
- In order to make Tax exemption claim the rent receipt must be provided
- Tax exemption claim can also be made if a person is paying rent to his or her family member except of a person’s spouse. A person cannot claim for tax exemption by showing a receipt of rent paid to his or her spouse.
- In case a person owns his or her house then he or she is not eligible for HRA exemptions.
- Tax is exempted on excess amount of rent paid over 10% of the total salary.
How HRA is Calculated
Thus, the following factors are taken into account while calculating the House Rent Allowances:
- Total Salary
- Amount of HRA received as a part of the salary
- Total amount of rent
- Location or residential area
Let us understand how HRA is calculated with the help of the following example.
Mr Ajay receives a monthly salary of Rs 30000. He lives in an apartment where he pays a monthly rent of Rs 15000.Therefore depending upon his residential area he can claim for 40 to 50% of allowances as HRA from his employer. The amount on which the tax is exempted can be calculated as:
Total salary of Ajay- Rs 30000
Total HRA received from the employer-20000
Excess amount of rent paid over 10% of the salary=15000-(10% of 30000)=15000-3000=12000
Thus, Ajay will have to pay tax on the following amount=20000-12000=8000
HRA that can be claimed for Tax Exemption is 12000/Month or 1.44 Lakh/Annum.
Section 80GG allows an employee to claim HRA deduction even when he or she does not get any house rent allowances from the employer. Benefits under section 80 GG can be claimed on the following grounds:
- If a person lives in rented accommodation but does not get any allowances from the employer
- When a person is self-employed or in business
- When a person does not own any property
- The house which is inhabited, or business is carried out should not be in the name of the spouse or children
If all of the above mentioned criteria met then a person claim for 25% or Rs 5000 or 10% less than the actual income for tax exemption under section 80GG.
HRA And TAX Deduction
Tax exemption on HRA is calculated on the basis of the guidelines provided under section 10(13A) of the Income Tax Act. A person who is self-employed cannot claim for HRA exemption under 10(13A), he or she will have to claim tax exemption under section 80GG of the income tax Act. Further, if a person pays more than Rs 1 lakh as rent then the PAN card of his or her landlord must be provided. If in case the landlord does not have a PAN card then a declaration of the same must be provided by the landlord along his or her name and address to the employer. PAN card of the landlord is asked so as to calculate the tax deduction on the person’s property.
Documents Required for HRA
The following documents must be provided while making a HRA claim:
- Form 12BB: It is a declaration comprising of the employer’s name, address and Permanent Account Number.
- Document to prove the claim like lease agreement, electricity bill, water supply bill, housing society addressing the tenancy or proof of payment of bill
How to Claim HRA For Parents with an Example
In case a person receives House Rent Allowance from his or her employer but lives with his or her parents then tax exemption can be claimed entering into a rental agreement with the parents.
In such a case, a person pays back to his or her parents and also reduces the tax burden. But the rent receipts must be provided to the employer to make tax exemption claims.
For example, Mr Raj works with multi-national company in Mumbai. He gets House rent allowances every month from his employer. He lives with his parents and pays rent to them as an act of good gesture. His parents have entered into a rental agreement with him so as to reduce his tax burden. In such a case Raj’s parents will have to claim for tax returns and Raj can claim for tax exemption on house rent by providing the receipt he received from his parents. In this way, the money will stay with the family itself.