How To Claim Tax Exemptions on House Rent Allowance

17 Feb, 2021

9 min read

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How To Claim Tax Exemptions on House Rent Allowance? - Smart Money
There is a provision under the Income Tax Act which allows salaried, self-employed, and professionals to get tax exemption for the house rent paid.

When you plan to file your IT, it is important to learn the various tax exemptions available to avoid paying excess tax. Here is how you can claim HRA tax deduction under IT. 

What is HRA?

HRA stands for home rent allowance is proposes to reduce the rent burden on the taxpayers.  Per the Indian Income Tax Act, salaried (in both public and private sector), self-employed, and even professionals are eligible to receive HRA tax exemption to make their rent expenditure affordable and desirable. It is a part of the salary, paid by the employer to the employee for their accommodation when they live in a rented property. HRA can be a fixed component of the salary or a derived part, agreed between the employee and the employer.  

Under section 10(13A) of Income Tax Act 1961, a part of home rent allowance is eligible to receive an exemption. However, do keep in mind that HRA is fully taxable if an employee is living in an owned house.  

How to calculate HRA

Use the following components to calculate HRA.

  • Salary 
  • HRA component of the salary 
  • Rent paid
  • Location of the rented property 

Nowadays, one can use an online HRA calculator to calculate HRA eligibility. 

HRA tax exemption

Salaried employees can claim tax exemption as long as they live in rented accommodation u/s 10-13A. However, there are certain conditions that one must know.

  • Tax exemption will be the lowest when the employer pays the HRA as a part of employees salary
  • Salaried individuals can claim up to 50 percent of their wage as HRA exemption provided they live in metro cities like Mumbai, Delhi, and others
  • Employees staying in other cities can claim up to 40 percent for HRA exemption
  • Extra rent paid over 10 percent of annual salary calculated as actual monthly rent paid minus 10 percent of salary

Here, the salary would include basic, dearness allowance (DA), and a variable part, if any. 

If you are a salaried individual but don’t receive HRA from the employer, you can claim deduction under section 80GG of the Income Tax Act. It is the same section which applies to self-employed individuals.

So, how much of you income is eligible for HRA exemption? Let’s understand with the help of an example. 

We are considering a salaried individual with the following details who is living in Mumbai.

Salary: Rs 30,000/per month

DA: Rs 2000

Rent Paid: Rs 15,000

HRA: Rs 100,000 per year

Sl no

Particular 

Amount (in Rs)

Amount (in Rs)

1

HRA

 

100,000

2

Rent paid for 12 months – 10% (Basic + DA)

(15000*12) – 10 %(30,000*12+2000*12) = 180,000 – 38,400

141,600

3

50% of salary (Basic+DA)

50%(30000*12+2000*12)

192,000

 

HRA exemption applies to the lowest value of 1,2, or 3. 

In the example above, the entire HRA received by the employee is exempted from tax.  

In case HRA exceeds Rs 100,000, taxpayers can still claim HRA exemption by providing PAN of the property owner and rent agreement. 

How to claim exemption u/s 80GG?

Section 80GG is a special provision that provides tax exemption for home rent allowance to self-employed and employees who don’t receive HRA from employers.

The minimum of the following three will apply for tax exemption.

  • Rs 5000/ month
  • 25 percent of adjusted total income is set as the upper limit to receive a tax exemption 
  • Actual rent minus 10 percent of total adjusted income, which means rent paid between 10 and 25 percent only qualifies for deduction under IT

Special Circumstances Where You Can Still Claim HRA Exemption

  • Taxpayers can still claim HRA deduction if they stay in their ancestral house by paying rent to their parents. All they need to do is draw a rent agreement and pay rent every month.
  • In case both husband and wife pay the rent jointly, both can claim a deduction in their respective IT filings, provided both of them can furnish separate rent payment receipt.  However, only one member can claim HRA exemption where there is a single receipt.   
  • In case the employer doesn’t allow the benefit of house rent allowance exemption, employees can still claim it under their income tax return as a refund on excess TDS.  

Documents Required To Claim HRA Exemption 

Here is a complete list of documents that employees need to claim tax deduction under home rent allowance (HRA).

  1. If the rent paid within a year is more than Rs 1 lakh, the taxpayer has to provide PAN and document of the property owner to claim exemption
  2. Rent receipts of the latest four months carrying the following information 
  • Name of the property owner 
  • Name of the tenant 
  • PAN card details of the owner 
  • Address of the rented property
  • Photocopy of the rent agreement when required  confirming duration of the stay
  • Rent receipt carrying a revenue stamp and the sign of the landlord on it

One must satisfy the following conditions to receive HRA exemption. 

  • An exemption is available u/s 80 only when the rent is directly paid by the employee. Also, there is no exemption for the period when the rent is not paid
  • If the rent is paid to any other member other than the father, employees can claim HRA exemption. To avoid any trouble, one should pay rent regularly and through bank transfer only 
  • Tax slab will adjust with the change in home rent allowance if the employee change job location (from a non-metro city to a metro city or otherwise)
  • Exemption under 80GG is available only when an employee doesn’t claim the deduction under any other section 
  • Self-employed individuals can also claim tax exemption under 80GG for expenses made towards paying house rent 

To claim tax deduction under 80GG, the taxpayer needs to confirm the following conditions   

  • Tax relaxations available only to HUF and individual 
  • Salaried employees and self-employed individuals can claim tax exemptions u/s 80GG if they haven’t received deduction under section 10-13A
  • One can’t claim tax exemption on a self-occupied property which they own elsewhere 
  • Employee as a member of HUF can claim tax reduction provided the HUF, minor child or the spouse doesn’t enjoy ownership of a property where the employee is working
  • Taxpayers need to provide a self-declaration on the form 10-BA to satisfy all the conditions to qualify for a deduction 

The Bottom Line

Salaried employees can claim HRA exemption u/s 10 of the IT Act. HRA is a benefit provided by the employer and not the right of an employee. Employees can claim HRA exemption only when they stay in a rented property. In case the paid rent exceeds Rs 1 lakh in a year, the employee needs to provide the PAN card details of the property owner in the HRA claim.

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