House Rent Allowance (HRA) is a component of the salary that is paid by an employer to an employee who lives in a rented accommodation. HRA helps the employee to meet the expenses of renting a house and also provides tax benefits. In this article, we will explain the meaning, calculation and tax benefits of HRA in India.
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9. Conclusion
Meaning of House Rent Allowance (HRA)
House Rent Allowance (HRA) in India is a part of the salary that is given by an employer to an employee to cover the rent of the house where the employee resides. HRA is usually a fixed percentage of the basic salary, which may vary depending on the city where the employee lives. HRA is applicable only for salaried individuals who live in rented houses. If the employee lives in his/her own house or does not pay any rent, then HRA is fully taxable.
What constitutes an HRA certificate?
An HRA (House Rent Allowance) certificate is a document issued by a government employee to claim a house rent allowance from their employer. This certificate is typically provided when the employee is unable to avail of government-provided accommodation as per the established procedures. It serves as proof that the employee is incurring expenses on rent for their residence and is eligible for the HRA benefit as per the terms of their employment.
Calculation of House Rent Allowance (HRA) in India
HRA is calculated based on the following factors:
1. Basic salary: This is the fixed part of the salary that does not include any allowances, bonuses or commissions.
2. Dearness allowance (DA): This is an allowance that is given to compensate for the increase in the cost of living due to inflation.
3. HRA received: This is the amount of HRA that is paid by the employer to the employee as per the salary structure.
4. Actual rent paid: This is the amount of rent that the employee pays for the house where he/she lives.
5. City of residence: This is the city where the employee lives, which can be classified as metro or non-metro. Metro cities include Mumbai, Delhi, Chennai and Kolkata. Non-metro cities include all other cities in India.
Tax Benefits of House Rent Allowance (HRA) in India
HRA can help the employee to save tax by reducing the taxable income under Section 10(13A) of the Income Tax Act. However, to claim the tax exemption on HRA, the employee has to fulfil the following conditions:
1. The employee should be a salaried individual who receives HRA from the employer.
2. The employee should live in a rented house and pay rent regularly.
3. The employee should have the rent receipts or the rental agreement as proof of payment.
4. The rent receipts should mention the name, address and PAN of the landlord, if the rent exceeds Rs. 1 lakh per annum.
When Landlord’s PAN Mandatory for HRA Exemption?
If your yearly rent exceeds ₹1 lakh, it's necessary to provide your landlord's PAN card details to your employer for HRA exemption purposes. If your landlord doesn't possess a PAN card, you can instead submit a written declaration from them stating so, along with their name and address.
Including the landlord's PAN card details aids the government in verifying the actual rent payments mentioned in receipts, particularly concerning cases where the total rent paid exceeds Rs 1,00,000 annually. Additionally, this requirement serves to address instances where landlords fail to declare rental income in their tax returns, encouraging compliance with tax regulations.
For rents exceeding Rs 8,333 per month, equivalent to an annual rent of Rs 1,00,000, ensuring compliance with this PAN requirement is crucial to retaining eligibility for HRA exemption. It's advisable to obtain the landlord's PAN or a declaration from them before finalizing the rental agreement, thereby avoiding potential complications during tax filing.
The amount of HRA that is exempt from tax
1. Actual HRA received from the employer
2. Actual rent paid minus 10% of the basic salary
3. 50% of the basic salary for metro cities or 40% of the basic salary for non-metro cities
The remaining amount of HRA is added to the taxable income of the employee.
How can you claim HRA without residing in a rented accommodation?
While not a clandestine tactic, if you're living with your parents and your company offers HRA, you can pay them rent equivalent to the allowance provided and subsequently claim the HRA benefit. To claim HRA (House Rent Allowance) when living with parents, you can follow these steps:
1. Enter into a Rental Agreement: Start by formalizing your living arrangement with your parents. Draft a rental agreement outlining the terms and conditions of the rent you'll be paying them. This agreement should specify the monthly rent amount, duration of the agreement, and other relevant details.
2. Transfer Monthly Rent: Ensure that you transfer the agreed-upon rent amount to your parents each month. This transaction should be documented and preferably made through electronic means such as bank transfers to maintain a clear record.
3. Maintain Records: Keep records of all rent payments made to your parents. This includes receipts, bank statements, or any other documentation that proves you've paid rent as per the rental agreement.
4. Report Rent Payments: Your parents need to report the rent you paid them as part of their income in their income tax return. They should include this rental income along with any other sources of income they have.
5. Tax Implications: Depending on your parents' overall income, they may be eligible for tax benefits. If their total income, including the rent you paid them, falls below the basic exemption limit or if they are taxed at a lower tax slab, they can potentially save on taxes.
6. Consult a Tax Professional: It's advisable to consult with a tax professional or accountant who can guide you and your parents through the process of claiming HRA and any associated tax implications. They can provide personalized advice based on your specific financial situation.
By following these steps and ensuring proper documentation, you can effectively utilize the HRA allowance provided by your company, even when living with your parents.
How to Claim House Rent Allowance (HRA) in India?
To claim the tax exemption on HRA, the employee has to submit the rent receipts or the rental agreement to the employer along with the declaration of the rent paid. The employer will then deduct the exempted amount of HRA from the taxable income of the employee and issue the Form 16, which is the certificate of tax deducted at source (TDS).
Alternatively, the employee can also claim the tax exemption on HRA while filing the income tax return (ITR). In this case, the employee has to fill the details of the rent paid and the HRA received in the ITR form and attach the rent receipts or the rental agreement as proof. The employee can then claim the refund of the excess tax paid, if any.
Conclusion
HRA is a beneficial component of the salary that can help the employee to manage the rent of the house and also save tax. However, to avail the tax benefits of HRA, the employee has to follow the rules and conditions laid down by the Income Tax Act. The employee should also keep the rent receipts or the rental agreement as evidence and submit them to the employer or the income tax department as required.
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