The House Rent Allowance (HRA) is an important component of most salaried pay structures. Unlike basic pay, HRA is not fully taxable in the hands of the employee. A portion of the HRA component is exempt from tax under Section 10(13A) of the Income Tax Act of 1961, subject to the satisfaction of certain conditions.
The HRA exemption is deducted from the total income of the assessee to arrive at the gross taxable income. Thus, a person will be liable to pay tax only on the income left after deducting the HRA deduction.
Please note that if an individual resides in a self-owned house and is not liable to pay rent, then the entire HRA received by him as a part of the total salary will become taxable and no exemption will be given to him/her.
How to Compute HRA Exemption?
The tax-exemption for HRA is a minimum of:
- Actual House Rent Allowance (HRA) Received
- 50% of salary if the employee lives in a metro, or 40% if the employee lives in a non-metro city; and
- The actual rent is less than 10% of the gross salary.
For the purpose of the calculation of HRA exemption, “salary” shall include basic salary, Dearness Allowance, and commission received on turnover.
Documents required to claim HRA Exemption
HRA exemptions are only available on submission of the following documents-
|If Annual Rent paid or payable||Documents Required|
|Up to Rs.100,000 p.a.||· Rent Agreement
· Rent Receipt
|More than Rs.100,000 p.a.||· Rent Agreement
· Rent Receipt
· PAN Number of the landlord
Let us understand the exemption provision with the help of an example:
Ram has a monthly salary of Rs. 80,000, which consists of basic pay of Rs. 40, 000, HRA of Rs. 25, 000, and other allowances of Rs. 15, 000. Ram resides in a rented property in Delhi and pays Rs 20,000 rent for accommodation. Ram is required to pay tax at a rate of 20% on his earnings and has chosen the old tax regime.
To compute the HRA exemption, the least of the following amounts should be considered:
- Actual House Rent Allowance (HRA) received = Rs. 25,000 p.m. x 12 months = Rs. 300,000.
- 50% of Salary (Because Ram lives in Delhi) = Rs. 40,000 p.m. x 12 months = 4,80,000
- Actual rent paid minus 10% of salary = (Rs. 20,000–Rs. 4,000) x 12 months = Rs. 192,000
Ram is entitled to an HRA exemption of Rs. 192,000 only despite receiving an HRA of Rs. 300,000 as part of his salary. Thus, a balance of Rs. 108,000 (Rs. 300,000 minus Rs. 192,000) should be taxable in the hands of Ram and will form part of his total taxable income.
Also, as you can see, to calculate the HRA exemption above, we have only considered basic pay of Rs. 40,000 as salary instead of the entire salary of Rs. 80,000, in accordance with the provisions of the Income Tax Act and rules thereunder.
Special Scenario – Individuals who do not receive HRA but have to pay rent (Deduction u/s 80GG)
There might be a case where an employee’s salary structure does not include an HRA component, or a non-salaried individual may also be living in rented accommodation. Then how can those individuals claim an exemption for rent paid by them or a part thereof?
If a salaried person is not getting HRA as part of his salary income or a non-salaried person is liable to pay rent, then these individuals can claim a deduction for the rent paid under Section 80 (GG) of the Income Tax Act by filing Form 10B.
Quantum of Deduction u/s 80 (GG) of the Income Tax Act.
Section 80 (GG) allows you to claim a deduction of the least one of the following amounts from your gross total income:
- Rent Paid minus 10% of total income
- 25% of the Total Income
- 5,000 per month.
Total income is calculated for Section 80GG by deducting long-term capital gains, short-term capital gains for which Securities Transaction Tax (STT) has been paid, and deductions allowed under Sections 80C to 80U, excluding the deduction under Section 80GG.
Conditions for claiming a deduction under Section 80 (GG) of the Income Tax Act
- The individual, or his/her spouse or minor child, should not be a member of any HUF that owns an accommodation.
- A person must not earn any rental income from any house property located anywhere.
We hope this article has answered all of your questions about House Rent Allowance and its taxability. Still, if you have any other doubts or queries, please drop them in the comment section and we would be more than happy to clarify them.