Many times, people have to move to a different city in order to work. In such cases, they may end up paying rent for accommodation. Hence, organizations often compensate employees for this expenditure by paying them HRA.
HRA’s full form in salary slip stands for House rent allowance. It is a part of the salary that employees receive over and above their basic pay for meeting accommodation expenses.
HRA or house rent allowance is a benefit provided by employers to their employees to help the latter cover their accommodation expenses or the cost of renting a house.
You can claim a deduction for HRA under Section 10(13A) of the Income Tax Act but remember it can be fully or partially taxable. The calculation of HRA deduction depends on multiple factors such as:
House rent allowance is eligible for HRA deduction under Section 10(13A) of the Income Tax Act if an individual meets the following criteria:
Like salaried individuals, self-employed do not receive the house rent allowance. But they could also be living in a rent for their accommodation. Keeping this in mind, the government has allowed self-employed individuals to claim a deduction for house rent.
As per Section 80GG of income tax rules, self-employed individuals who do not receive a house rent allowance from the employer can claim a deduction for the rent paid. However, the maximum amount that can be claimed under this section is up to Rs 60,000 (Rs 5,000 per month).
To compensate salaried individuals for their accommodation expenses, the employer pays a house rent allowance to the employees. It is part of the CTC (Cost-to-Company) mentioned in your salary breakup.
Since it is part of your salary income, it is taxable in your hands. However, it’s not completely taxable. As per Section 10 (13A) of the Income Tax Act, you can claim tax deduction for some part of the HRA, and you will have to pay tax for the remaining part. Here’s how you can calculate the exemption amount.
HRA calculations are based on a number of factors, including your salary, the HRA you receive from your employer, the actual rent you pay, and whether you live in a metro or a non-metro city. However, when computing the HRA tax calculation, the amount of exemption will be the lowest of:
Consider the following example for a better understanding of the HRA formula:
Mr. Gopal Ramanath lives and works in Pune. He has a rented accommodation, paying Rs. 7,000 per month. His monthly salary is Rs. 45,000, with the following break up:
| Component | Amount (INR/ Rs.) |
|---|---|
| Basic Pay | 25,000 |
| HRA | 8,500 |
| Allowances | 8,500 |
| PF | 3,000 |
| Total Salary | 45,000 |
Using the HRA calculation formula, Mr. Ramanath gets:
The maximum deduction that Mr. Ramanath can claim under section 80C of the ITA as HRA deduction would be the lowest of the three amounts, ₹54,000.
The remaining ₹48,000 of the HRA allowance will be taxable as per Mr. Ramanath’s income tax slab. If you are still not convinced that you can calculate your HRA using pen and paper, don’t worry you can use the free online HRA Calculator instead.
HRA exemption rules state that HRA deduction is only allowed for salaried and self-employed individuals who live in rented accommodation. This means that even if your salary structure has an HRA section or component if you are not paying rent, the entire amount will become taxable.
Taking Mr. Ramanath’s example, if he did not pay rent, then the HRA of Rs. 84,000 paid to him by his employer would be taxed under his applicable income tax bracket.
For self-employed individuals who do not receive an HRA component, HRA rules allow the benefit of claiming HRA exemption under Section 80GG of the ITA. This is the route that even salaried individuals paying rent can take in case their employer does not pay HRA.
Therefore, while calculating HRA exemption, it is important to understand whether you can claim the deduction under Section 10(13A) or Section 80GG of the ITA.
You can claim a deduction under Section 80GG at the time of filling your ITR. You must possess a valid rent receipt or rent agreement as evidence that you are staying in rented accommodation to avoid tax discrepancies in the future.
As per the income tax rules, self-employed individuals who do not receive HRA from the employer can avail the lowest of the following three as a deduction.
Adjusted income is your total income minus long-term capital gains, short-term capital gains under Section 111A, and deductions from Section 80C to 80U (excluding Section 80GG deduction). Income under Sections 115A, 115AB, 115AC, or 115AD.
HRA deduction under Section 10(13A) of the ITA has the following benefits:
Self-employed and salaried individuals who do not receive an HRA cannot claim house rent allowance deduction under Section 10(13A) of the ITA. However, they can still avail the benefit of rent exemption under Section 80GG of the Income Tax Act.
Under Section 80GG, an individual can claim the least of the following in lieu of the house rent they pay:
For instance, let us assume that Ms. Gayathri Nair, living in Chennai, is self-employed and makes an annual gross total income of Rs. 6,00,000. She pays rent of Rs. 20,000 a month. The tax exemption she can claim under Section 80GG while filing her taxes is the lowest of:
Finally, the deduction Ms. Nair can claim under Section 80GG of ITA is ₹60,000.
When understanding the difference between what is HRA and the deduction claimed under Section 80GG, here are some points to keep in mind:
An individual must submit certain documentation proofs to claim an HRA tax exemption. This includes receipts showing the rent used for HRA deduction calculation or the rental agreement with the equivalent rent amount mentioned. If your landlord has not given rent receipts, you can use ET Money’s rent receipts generator tool. You can download your rent receipts from here and submit them to the HR department of your organization to claim an HRA deduction.
Additionally, if the rent exceeds ₹1,00,000 per annum, a copy of the landlord’s PAN card or a signed declaration form from them is required. For rent paid to family members or parents, the same proofs will be needed for HRA tax calculation.
HRA deduction can be claimed under Section 10(13A) for salaried individuals and under Section 80GG for self-employed individuals or salaried people who do not get HRA.
How HRA is calculated?For salaried individuals, HRA is the lowest of the following:
The HRA paid by the employer
Actual rent paid for accommodation minus 10% of basic pay (salary + dearness allowance)
50% of basic pay for those living in a metro city or 40% of basic pay for those living in a non-metro city
For self-employed individuals, HRA is the lowest of:
₹60,000
25% of gross total income
Actual rent paid minus 10% of the gross total income
The amount of HRA you can claim depends on the salary, HRA received, the annual rent paid, and the place of residence. For salaried individuals, it is usually the lowest of HRA paid by an employer, actual rent paid for accommodation minus 10% of basic pay, or 40%/50% of basic pay for those living in non-metro/metro cities
Is HRA calculated monthly or yearly?HRA is computed annually.
Is HRA part of 80C?No. HRA exemptions can be claimed under Section 10(13A) or Section 80GG.
I have forgotten to submit rent receipts to my employer. How can I claim the HRA tax benefit now?Yes. Even if you have forgotten to submit rental receipts, you can claim an HRA rebate while filing your income tax returns. All you have to do is manually calculate the HRA tax exemption using the formula mentioned above and then report this as an expense under Section 10(13A) in ITR1. You will also need to declare this in Form 16 – Part B.
Can I claim HRA tax exemption when paying rent to a family member?Yes. Rent paid to family members, including parents, can be claimed as an HRA deduction as long as there is a valid proof of payment. However, rent paid to a spouse is not eligible for deduction.
Can the maintenance charges that I pay for my apartment be included for HRA tax exemption?No. HRA deductions are allowed only for rent payment. Maintenance charges, electricity charges, utility payments, etc. are not included.
As per Income Tax Rules, you can claim an HRA deduction if you live with your parents and pay rent to them. But in this case, you must fulfill the following requirements:
1.The house should be owned by the parents only. If you are the joint owner, then it is not applicable.
2. The rent amount should be directly transferred to the parent’s bank account or given by cheque.
3. You need to have a valid rent agreement with your parents.
4. Your parents will have to show rental income in their total income.
HRA certificate is a declaration the government employee gives for claiming house rent allowance. This applies to government employees who have not received or refused government accommodation for the period for which the allowance is claimed.
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Written By Sridhar SahuSridhar Kumar Sahu is a Content Writer for ET Money. He has over six years of experience in covering personal finance topics and markets. He holds a Master’s degree in English Journalism from IIMC, New Delhi and B.Tech in Mechanical Engineering from BPUT, Odisha.