All about HRA calculation and HRA exemption

[ecis2016.org] Explained in this article is the process to claim exemption on your house rent allowance and various other key aspects of this crucial component of your salary package

Since house rent allowance or HRA is almost always an integral part of a company’s salary structure, knowing the nitty-gritty of HRA calculation and HRA exemption is crucial for tax savings purposes.

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How so?

Employers expect the employee to spend the HRA amount, towards meeting his accommodation requirements. Unless the employee proves that he has used this amount for this specific purpose, the entire amount becomes taxable and the employer will deduct tax at source (TDS), accordingly.

HRA exemption

HRA exemptions are allowed under the Income Tax (IT) Act. Section 10(13A) of the Act provides that a salaried person can claim tax benefits with respect to the house rent allowance from his employer, on fulfilment of certain conditions. Listed below are the conditions.

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Conditions for claiming HRA rebate under Section 10 (13A)

Key conditions that ought to be fulfilled:

• Only salaried individuals can claim deductions under this section.
• The HRA should be a part of your salary package.
• You should actually be living in a rented accommodation in the city where you work.
• The deduction is available only for the period, during which the accommodation is occupied by the tax payer.
• To claim the benefit, the tenant will have to provide proof of actual rent payment.

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HRA exemption limit

The HRA exemption that a salaried person is eligible to receive, is the lowest of the following amounts according to Rule 2A of the IT Rules 1962:

• The actual HRA you get;
• 50% of your basic salary plus dearness allowance (DA), if you live in metro cities or 40% for non-metros;
• Actual rent paid, minus 10% of your basic salary plus DA.

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HRA calculation 

Delhi-based Rajat Ghai’s monthly basic salary is Rs 50,000 and he receives Rs 18,000 as HRA. For his rented home, he pays Rs 15,000 as monthly rent. In his case, the deduction will be the least of the three amounts:

• 50% of his basic salary = Rs 25,000
• Actual HRA = Rs 18,000
• Actual rent minus 10% of the basic salary = Rs 10,000 (which is the least of the three).

So, the annual deduction he can claim = Rs 1.20 lakhs

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HRA calculation: Example 2

Patna-based Ravi Prakash Kashyap earns Rs 20,000 as his basic salary. While his HRA is Rs 7,000, he pays Rs 6,000 for his rented quarters. In his case, the deduction will be the least of the three amounts:

• 40% of his basic salary = Rs 8,000
• Actual HRA = Rs 7,000
• Actual rent minus 10% of the basic salary = Rs 4,000 (which is the least of the three).

So, the annual deduction he can claim = Rs 48,000

How to claim tax exemption on HRA?

Salaried people can claim this exemption through their employer, by submitting house rent receipts in the last quarter of that financial year.

When you submit your rent receipts to your employers, you provide them with proof of your rental expense. This prompts them to deduct, TDS while keeping in view the exemptions. This is also the most uncomplicated way to claim tax exemption on HRA, since the exemption would automatically flow into the part B of your Form 16 and the tax return. From the assessment year 2019-20, the IT Department has synced the ITR-1 with Form-16.

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Those who have not claimed this exemption through their employer, can still do so while filing their income tax return (ITR) for the financial year. The same is true for those, whose company has deducted the TDS on the whole HRA component, because of their failure to produce the rent receipts. They can claim the excess TDS at the time of filing their ITR. The IT Department will refund the excess of deducted TDS accordingly. Since you have not provided your employer with the rent receipts or any other documentary proofs, your Form-16 will show the HRA portion of your salary as entirely taxable.

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While filling your ITR form, you will have to provide every detail, with respect to your salary – the basic salary, the HRA and other allowances. You will also have to provide the details of that part of the HRA which is exempt from tax deductions, aside from the part that is not. The taxable portion of HRA component should be included as a part of ‘salary as per Section 17 (1)’ while the exempt portion of the allowance should be added under heading ‘allowances to the extent exempt under Section 10′.

While you will not be required to send any documentary proof of the rent payment while filing your ITR, you might be later asked by the Central Board of Direct Taxes (CBDT) to send the proof for the exemptions you have claimed. So, be ready to send those, as and when the time comes.

How to claim HRA when living with parents?

Those living with their parents can also claim exemptions on the HRA, as long as they are paying rent to their parents under a legally valid rental agreement. For this purpose, they will have to show the rent receipt while their salary account should also tally the claims they make while declaring their rental expense. Unless all these requirements are fulfilled, it may be a bad idea to claim deductions on HRA, as in the recent years, the tax authorities have gone after people attempting to claim deductions without actually incurring any expense. Also note that the rent you pay to your parents would be calculated in your parents’ annual income and they will be liable to pay taxes for the same.

More importantly, this arrangement works only between parents and children and not between spouses and siblings.

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How to claim exemption if the company does not provide HRA?

If you pay rent for any residential accommodation occupied by you but do not receive HRA from your employer, you can claim the deduction under Section 80GG by following the same process. Working professionals can also claim the HRA deductions under this section.

PAN requirement for HRA exemption claim

According to circular number 8/2013 issued by the Tax Department on October 10, 2013: ‘If the annual rent paid by the employee exceeds Rs 1 lakh per annum, it is mandatory for the employee to report the PAN of the landlord to the employer’. This means that providing your landlord’s PAN details is a must for filing HRA exemption claims, in case the rental amount exceeds Rs 1 lakh per annum.

Individuals can still claim the deductions, in case their landlords do not have a PAN card, as the IT laws do not mandate him to provide the PAN details of the landlord. However, in this case, be ready with the paperwork, because any discrepancies might ignite suspicion in the eyes of the tax authorities, who might initiate a probe against you.

‘In case the landlord does not have a PAN, a declaration to this effect from the landlord, along with the name and address of the landlord, should be filed by the employee’, the circular reads further.

Key points to remember when claiming HRA exemption 

• Unless you are actually paying rent in excess of 10% of your salary, you will not be able to claim any exemptions on house rent allowance.
• Those working in public sector companies, get an HRA exemption based on the minimum or maximum HRA in different cities, according to the recommendations of the 7th Pay Commission.
• If you fail to submit rent receipts to your employer, the employer will not factor in the HRA exemption and will deduct tax from the entire HRA amount.
• The tax exemption of HRA is not available, if you choose the new tax regime from the financial year 2020-21 (assessment year 2021-22).
• Those paying rent to NRI landlords should deduct TDS of 30%, before making the rental payment.
• India’s IT law does not mandate that the tenant has to pay the same landlord throughout the year. So, the number of times you change places during the year, makes no difference as far as exemptions are concerned.
• You cannot claim exemption for the period for which you have not paid rent.
• There is no legal restriction on the mode of rent payment either. You could pay the rent in any manner – cash, cheque, online channels, etc. All you have to do, to claim the exemption, is to produce a proof of making this payment. Your bank account statement, for example, acts as the perfect proof in this regard.

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