House Rent Allowance (HRA), is an important component in our salary slips, with upto 30% of basic pay (+DP) in metros. HRA is the allowance given to meet the staff's expenses towards renting an accommodation. Though very simple in concept and calculation, the tax implications of the HRA, puzzles many a people. Here are 7 must knows, to help you utilise this component of your salary in a tax efficient manner.
1) Conditions you need to satisfy for a HRA exemption
Under Section 10 of the Income Tax Act, certain exemptions are
permissible on the received HRA. To claim such exemptions one must satisfy the
below conditions.
- The employee must not own the property in which he is residing.
- Employees must be paying rent for the accommodation in which residing.
- Such rent must be more than 10 per cent of his/her salary (see section 5).
if not, an exemption cannot be availed if there is no
HRA component in the salary.
2) Calculating HRA for tax exemption
HRA tax exemption is based on the HRA received, basic
pay, actual rent paid as well as if you stay in metro or non-metro. The amount
exempted from the tax calculations is the least of the following.
- The actual rental allowance paid by the employer as part of the salary.
- The actual rent paid, from which, 10% of the basic pay is deducted,
- 50% of the basic salary if residing in a metro or 40% if in a non-metro.
3) HRA benefits in case of rent paid to parents
If you are residing in a house owned by your parents and you are paying
rent to them, technically, they are the landlords. You could, thus, claim an
exemption, provided they show the same transaction in their income tax
returns.
Rent to husband/wife are not
permissible, as a husband and wife relationship is not considered
commercial and are also are meant to stay together.
4) Proof to be submitted for HRA claims
If the house rent paid is upto Rs. 3000 per month, then rent receipt is
not mandatory. Otherwise you will have to submit the rent receipt proofs to
claim the tax deduction. A one rupee
revenue stamp affixed with the signature of landlord receiving the rent, with
other details of the rented address, rent paid and name of the person who rents
it, need to be mentioned on the receipt.
5) Meaning of salary for HRA calculation
Salary for HRA purposes is as follows:
- Basic salary (Basic Pay plus Dearness Pay)
- Dearness Allowance
- Commissions earned if any
This salary will not include arrears of earlier years, received during
the previous year for which the claim is made.
6) You could claim HRA exemption as well as a home loan tax benefit at
the same time
HRA exemption could be availed even if you are claiming a home loan tax
benefit. For a home loan, tax benefits are available towards the repayment of
principal. So, as long as you meet the criteria for a home loan deduction as
well for a HRA exemption, you could go ahead and claim both tax benefits. This
could be possible, in cases where you may be working in another city.
7) Period in which HRA exemption can be claimed
The period in which the HRA is actually received from the employer, must
necessarily pertain to the period in which the employee actually pays rent for
his accommodation. In case HRA is received for a period in which no rental
accommodation is occupied by the employee, exemption cannot be
claimed.