For most employees, House Rent Allowance (HRA) is a part of their salary structure. Although it is a part of your salary, HRA, unlike basic salary, is not fully taxable. Subject to certain conditions, a part of HRA is exempted under Section 10 (13A) of the Income-tax Act, 1961.
Amount of HRA tax exemption is deductible from the total salary income before arriving at a gross taxable income. This helps an employee to save tax. But do keep in mind that the HRA received from your employer, is fully taxable if an employee is living in his own house or if he does not pay any rent.
Do keep in mind that every financial year, a salaried individual has to choose between the old and new tax regime, provided there is no business income. From April 1, 2023, the income tax laws for new tax regime has changed. The income tax slabs in new tax regime have been reduced from six to five. The basic exemption limit has been hiked to Rs 3 lakh. Standard deduction from salary and pension income has been introduced in new tax regime. The surcharge rate has been reduced from incomes above Rs 5 crore in new tax regime. There are no income tax changes for financial year 2024-25.
Hence, if an individual opts for new tax regime in current financial year 2024-25, then he/she cannot claim tax exemption for HRA. However, if he/she opts for old tax regime and receives HRA, then one can claim tax exemption.
Who can avail HRA tax exemption?
This tax benefit is available only to the salaried individuals (opting for old tax regime) who have the HRA component as part of their salary structure and is staying in rented accommodation. Self-employed professionals cannot avail this deduction.
Use our HRA calculator to save income tax
How much of HRA is tax-exempt as per income tax laws?
The tax-exemption for HRA is the minimum of:
i) Actual HRA received
ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and
iii) Excess of rent paid annually over 10% of annual salaryFor calculation purpose, the salary considered is ‘basic salary’. In case ‘Dearness Allowance (DA)’ (if it forms a part of retirement benefits) and ‘commission received on the basis of sales turnover’ is applicable, they too are added to compute the minimum HRA exemption available.
This tax benefit is available to the person only for the period in which the rented house is occupied.
Example of tax-exemption on HRA
Let’s say an individual, with a monthly basic salary of Rs 20,000, receives HRA of Rs. 8,000 and pays Rs. 10000 rent for accommodation in a metro city. The tax rate applicable to the individual is 20 per cent (i.e., between income tax slab of above Rs 5 lakh and up to Rs 10 lakh) on his income under the old tax regime.
To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:
i) Actual HRA received = Rs. 96,000 (8000 x 12)
ii) 50% of salary (metro city) = Rs. 1,20,000 (50% of Rs (20,000 x 12 = 2,40,000))
iii) Excess of rent paid annually over 10% of annual salary = Rs 96,000 (Rs .1,20,000* – (10% of Rs. 2,40,000))
*10,000X12 = 1,20,000
From the above example, the actual HRA received by an individual of Rs 96,000 will be exempt from tax. This is because the lowest amount is Rs 96,000 which will be exempt from tax.
Documents required to claim HRA tax exemption
HRA exemptions can be availed only on submission of rent receipts and the rent agreement with the house owner to the employer. According to tax experts, it is mandatory to have both rent agreement and rent receipts from landlord to claim the HRA tax exemption. Further, it is mandatory for an employee to report the PAN of the ‘landlord’ to the employer if the rent paid is more than Rs 1 lakh annually to avail the tax benefit.
Special cases to claim HRA tax exemption
There could be special scenarios in claiming HRA tax benefit, such as:
1. Paying rent to Parents, wife and family members
The rented premises must not be owned by the person claiming the tax exemption. So, if you stay with your parents and pay rent to them then you can claim that for tax exemption under HRA.
However, make sure you have documentary evidence as proof that financial transactions regarding your tenancy take place between you and your parent. So, keep a record of banking transactions and rent receipts and rent agreement because your claim can get rejected by the tax department if they are not convinced by the authenticity of the transactions.
Also Read: Can you claim HRA tax exemption for rent paid to wife, parent and family members?
Previously, there has been an instance in which the HRA claim of a salaried taxpayer was rejected by the Mumbai income tax appellate tribunal because the claim for HRA did not appear genuine to the tax officials.
However, paying rent to wife is subject to litigation as per tax experts. A salaried individual must have robust documents to prove the genuineness of the HRA tax exemption claim.
2. Own a house, but staying in a different city
One can avail simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home is rented out and you work in another city.
Individuals who don’t get HRA but pay rent
There may be some employees who might not have an HRA component in their salary structure. Also, a non-salaried individual might be paying rent. For them, Section 80GG of the Income-tax Act offers help.
An individual paying rent for a furnished/unfurnished accommodation can claim the deduction for the rent paid under Section 80(GG) of the Income-tax Act, provided he is not paid HRA as a part of his salary by furnishing Form 10B. This deduction is also available under old tax regime only.
How much tax deduction available under section 80GG
The least of the following is available for exemption from tax under Section 80GG:
(i) Rent paid in excess of 10% of total income
(ii) 25% of the total income*
(iii) Rs.5,000 per month
*Under this section, the total income is calculated as gross total income minus long-term capital gains, the short-term capital where Securities Transaction Tax (STT) has been paid and deductions available under Sections 80C to 80U, except Section 80GG.
Conditions to claim deduction under Section 80GG
While claiming a tax deduction, one must remember that the individual himself or his/her spouse, or minor child, or as a member of the Hindu Undivided Family (HUF) must not own any accommodation. Also, if the individual owns any residential property at any place and earns rent from it then no deduction is allowed.
One can avail the simultaneous benefit of deduction available for the home loan against ‘interest paid’ and ‘principal repayment’ and HRA in case your own home is rented out or you work in another city. However, the same is not available in case of Section 80GG.
