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HRA: Exemption, Deduction, Calculation and more.

Created on 30 Sep 2022

Wraps up in 5 Min

Read by 2k people

Updated on 01 Dec 2022

I feel like a child whose mother has made a delicious chocolate cake, and as soon as the child is about to gorge on it, all the other siblings start putting their spoons in it. In the end, the child is left with a few slices. 

The spoons in the above example are various bills, groceries, rent, taxes etc., that we have to pay, while the slice of cake is the salary left after paying for all the expenses.

That's where tax exemptions appear and act like a superhero. Well! I am sure that our landlord is not like Babu Rao from Hera Pheri, who was generous enough to lower the rent from ₹3000 to ₹200, as this isn't the case in reality. 

In this article, we'll about House Rent Allowance, i.e. HRA in salary and how you can get exemptions on HRA. 

What is HRA in salary? 

House Rent Allowance (HRA) is a component of our salary provided by the employer. The HRA in the salary component provides for the rent of the house

Moreover, HRA exemption in income tax can be availed under rule 2A and Section 10 (13A) of the Income Tax Act, 1961. 

As Sheldon Richman said: "Tax relief through deductions is very precarious. It is a way for the government to let you keep a little cash without conceding that it is your money."

The HRA exemption in income tax caters to both self-employed and salaried individuals who stay in rented accommodations. 

How is HRA calculated? 

"The purpose of a tax cut is to leave more money where it belongs: in the hands of the working men and women who earned it in the first place." - Bob Dole.

HRA represent a portion of our salary, which decreases our liability for taxes if we live in an apartment that is rented and therefore makes us eligible for tax exemption. 

Therefore, it is important to understand the calculation of HRA in salary. Let's take an example!

I live in Mumbai, receiving an HRA of ₹13,000 per month from my employer, my basic salary is ₹30,000 per month, and my monthly rent is ₹10,000. So let's see how much HRA exemption I can claim. 

Calculation of HRA in salary - Insider by Finology

Basic salary 

₹30,000

HRA

₹13,000

Conveyance allowance 

₹2,000

Special allowances 

₹3,000

Leave travel allowance (LTA)

₹5,000

Total Earnings 

₹53,000

Additionally, there is a ₹2,000 PF contribution and ₹200 professional tax deduction from my salary.

Since there is a tax exemption on HRA, we must understand the HRA calculation for income tax. As per the income tax rules and regulations, the tax exemption calculation is carried on the minimum amount of the following amounts:

  • HRA is received from the employer on our basic salary. 
  • Actual Rent paid minus 10% of the basic salary.
  • 50% of the basic salary is eligible for HRA tax exemption if we are staying in the metro cities, while 40% of the basic salary is eligible for HRA tax exemption if we are staying in the non-metro cities.

Taking the above example, let us understand my HRA Calculation for income tax. 

HRA Calculation for income tax - Insider by Finology

Actual HRA component of salary

₹13,000 * 12 = ₹1.56 lakh

50% of his basic salary

50% of ₹30,000 * 12 = ₹1.80 lakh

Actual rent paid minus 10% of basic salary

(₹10,000 * 12) - (10% of ₹30,000 * 12) = ₹1.2 lakh – ₹36,000 = ₹84,000

As observed in the above table, ₹84,000 is the lowest amount for which I will get a tax exemption, and the remaining amount is taxed according to the income tax slab. 

Moreover, HRA tax exemptions are also available for self-employed people. A special provision is made under Section 80 GG. The self-employed person needs to submit the required documents to avail of the benefit.

HRA can be availed of even if you have taken a home loan. 

What are the important things to remember while applying for an HRA claim?

"Next to being shot at and missed, nothing is quite as satisfying as an income tax refund." - F. J. Raymond

It is an attractive opportunity to claim HRA in salary. However, the following key points must be considered before applying for HRA. They are:

  1. We do not become eligible for HRA instantly. One must stay in a rented accommodation to claim it. 
  2. We cannot claim the HRA in salary if we, our spouse, our child, or anyone in our joint family owns an accommodation. 
  3. HRA deduction cannot be claimed if we own property and earn rent from it. 
  4. We cannot claim HRA if the rent is paid to the spouse. 
  5. We can still avail of the benefits of HRA in salary even if we stay with our parents and pay the rent to our parents.  
  6. It is necessary to submit the PAN details of the landlord if the annual rent exceeds the limit of ₹1 lakh. 
  7. If the employer cannot offer HRA in salary because the landlord doesn't have a PAN number, one can still claim HRA. The excess tax can be claimed directly, which is deducted from the income tax return for the year. 
  8. A TDS of 30% is deducted from the salary if the landlord is NRI. 
  9. Apart from that, there are special benefits for the HRA for central government employees. All the central government employees are entitled to HRA benefits under the 7th Pay commission. The HRA for central government employees is now at 34% after a hike of 3%.

What are the documents required to claim HRA tax exemptions? 

If one wishes to claim HRA in salary or taxes, then one should keep the following documents ready:

  • The HRA in salary requires documents like rental agreements and rental receipts. Based on these documents, the employer will sanction a deduction of HRA in salary under form 16. 
  • We must submit a rent receipt if the monthly rent is between ₹3001 to ₹8333. Additionally, we must ensure that each rent receipt has a 1 rupee revenue stamp with the landlord's signature.
  • It is the same scenario if the annual rent is more than ₹1 lakh, with the landlord's PAN number. However, the HRA declaration is enough if the monthly rent is below ₹3000. 
  • If we pay the rent to parents, we need to keep documentary evidence as proof. Primarily we need to have a record of all financial transactions.
  • If the landlord cannot give the PAN number, we need to get the declaration from the landlord. The document must have the reason for not having a PAN, the landlord's phone number, and the address.

Apart from that, we need to get form 60 filled out from the landlord and submit the form along with the HRA claims. 

The Bottom Line

I feel these tax exemptions are boons in disguise in this complex system of taxes. They reduce our monthly expenses, especially exemptions like HRA in salary, and reduce our financial pressure significantly. These exemptions are not limited to salaried people and self-employed people.

Moreover, we learn more from our viewer's opinions and experiences. So let us know various views on HRA in salary and its importance in the comment section. 

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Kirti Pimpalgaonkar

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The celebrity Youtuber at Finology who is ‘everything at once’, be it knowing financial concepts, making videos & reels, social media marketing, content creation or whatnot. She makes anything and everything her own and delivers the best. Kirti is often called the in-house Pranjal Kamra when it comes to making videos. Finology's very own occasional Zumba teacher whom her colleagues  love & adore.

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