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2021

Treatment of House Rent Allowance under the Income Tax Act, 1961

Treatment of House Rent Allowance under the Income Tax Act 1961

House Rent Allowance (HRA) is the allowance provided by an employer to their employee as a compensation for house rental expenses paid by the employee. It forms part of the salary paid by the employer to their employee.

House Rent Allowance or HRA is a salary component paid to employees by an employer towards the accommodation cost of living in that city. Even though it is a part of your salary, unlike your basic pay, HRA isn’t entirely taxable, subject to conditions (a percentage of HRA is exempted under Section 10 (13A) of the IT Act, 1961).

House rent allowance (HRA) is a basic component of your salary. However, most of us are not familiar about the rules that can help us save tax on it. If you are a salaried employee living on rent, then here's how you can use HRA to reduce your tax liability.

Salaried individuals, who live in rented houses, can claim the House Rent Allowance (HRA) to lower their taxes – partially or wholly. The allowance is for expenses related to rented accommodation. If you don’t live in rented accommodation, this allowance is fully taxable.

Computation of Exempt HRA Amount:

  • The amount of HRA received from employer is not fully exempt from tax. The tax-exempt portion of the HRA is computed as follows:

Least of the following amount is exempt from Tax:

Actual HRA Received

or

Actual Rent paid less 10% of Salary

or

50% of Salary for those living in Metro Cities (40% for Non-Metros).

 

Meaning of Salary:

  • Here 'salary' means basic salary and dearness allowance (DA) (if it forms part of the retirement benefit) and commission received on the basis of percentage of turnover.
  • No other allowances like special allowance are added into to your salary for computing the tax-exempted HRA amount.

Metro-cities:

  • Delhi, Mumbai, Chennai and Kolkata are considered as metro-cities for the purpose of HRA computation:

Requirement of PAN of the Landlord:

  • If you have taken a house on rent and are making a payment in excess of Rs 1 lakh annually – remember to provide the landlord’s PAN; else, you may lose out on the HRA exemption.
  • Landlords without a PAN must be willing to give a declaration refer circular No. 8/2013 dated 10th October 2013.
  • Tenants paying rent to NRI landlords must remember to deduct TDS of 30% before making the payment towards rent.

Section 80GG Deduction for House Rent:

If pay rent for any residential accommodation occupied by you, but do not receive HRA from your employer, you can still claim the deduction under Section 80GG. Conditions that must be fulfilled to claim this deduction:

You are self-employed or salaried

b. You have not received HRA at any time during the year for which you are claiming 80GG

c. You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession.

In case you own any residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. The other property would be deemed to be let out in order to claim the 80GG deduction.

The least of the will be considered as the deduction under this section:

Least of the following amount deductible under Section 80GG

Rs 5,000 per month

or

25% of Adjusted Total Income

or

Actual Rent less 10% of Adjusted Total Income

Adjusted Total Income:

  • Adjusted Total Income means Total Income Less long-term capital gain, short-term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U (except deduction under section 80GG).

Note: Self-employed individuals can also claim benefits for their rental payment under section 80 GG of the IT Act.

Claiming HRA Deduction while living with Parents:

  • The main condition for claiming deduction of HRA is actual payment of rent.
  • If you live with your parents in their house but do not pay any rent, you cannot claim any exemption.
  • So, to claim HRA exemption, you must actually pay rent to your parents on monthly basis and also enter into a rent agreement with them.
  • However, it should be noted that the amount of rent paid to parents will be taxable in their hands under the head ‘Income from House Property’.

Example:

Mr. X, employed in Delhi, has taken up a house on rent for which he pays a monthly rent of ₹25,000. He receives a Basic Salary of ₹50,000 per month. He also receives HRA of ₹ 1 lakh from his employer during the year.

Computation of Exempt HRA:

Particulars

Amount

Actual HRA received during the FY

1,00,000

50% of Basic Annual Salary [6,00,000*50%)

3,00,000

Actual Rent minus 10% of Salary (3,00,000 – 60,000)

2,40,000

Exempt HRA 

1,00,000

Hence, ₹ 1,00,000 would be exempt from tax u/s 10(13A).

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