HRA Taxability & Section 80GG Deduction on Rent Paid

House Rent Allowance (HRA) is a common component of the salary structure. Although HRA is a part of the salary, unlike basic salary, is not entirely taxable. Subject to certain conditions, a part of HRA gets exempted under Section 10 (13A) of the Income-tax Act. The tax benefit on HRA is available only to a salaried individual who has the HRA component as part of his salary structure and is staying in a rented accommodation. Self-employed professionals cannot avail the deduction.

Amount of Exemption on HRA Benefit — Section 10 (13A)

The exemption for HRA benefit 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 salary (Rent paid minus 10% of Salary)

For Calculation purpose, Salary = Basic Salary + Dearness Allowance (DA) (if it forms a part of retirement benefits) + commission received on the basis of sales turnover

The tax benefit is available to the person only for the period in which the rented house is occupied.

Example of HRA calculation

Let’s say an individual, with a monthly basic salary of Rs 15,000, receives HRA of Rs 7,000 and pays Rs 8,400 rent for an accommodation in a metro city. The tax rate applicable to the individual is 20 percent of his income.

To avail HRA benefit, the least of the following amount  is exempted, rest is taxable:

i) Actual HRA received = Rs 84,000 (7,000 * 12)

ii) 50% of salary (metro city) = Rs 90,000 (50% of Rs 1,80,000)

iii) Excess of rent paid annually over 10% of annual salary = Rs 82,800 (Rs 1,00,800 – (10% of Rs 1,80,000))

It shows that of Rs 84,000 actually received as HRA, Rs 82,800 gets tax exemption and only the balance of Rs 1,200 gets added to the employee’s income, on which a tax of Rs 240 ( 20 per cent slab ) gets payable.

Documents Required for HRA

HRA exemptions can be availed only on submission of rent receipts or the rent agreement with the house owner.
It is mandatory for the employee to report the Pan Card of the ‘landlord’ to the employer if the rent paid is more than Rs 1,00,000 annually, or if it exceeds Rs 15,000 per month.

Some Special Cases:-

1. 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 deductions as HRA. However, you cannot pay rent to your spouse. As, in the view of the relationship, you are supposed to take the accommodation together.

2. 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.

Individuals who don’t get HRA but pay rent – Section 80GG

Self employed professionals and Salaried individuals who has not received HRA but they actually paid the rent can claim deduction under section 80GG.

Amount of Deduction — Section 80GG

The least of the following is available for exemption from tax under Section 80GG:

(i) Rent paid in excess of 10% of Adjusted Income (Rent Paid minus 10% of Adjusted Income)

(ii) 25% of the total of the Adjusted Income

(iii) Rs 5,000 per month

For Calculation purpose, Adjusted Income = Gross Total Income minus Long term capital gain minus Short term capital gain of 10% category minus Deductions under sections 80C to 80U except section 80GG and income of foreign company.

Example of Section 80GG

Mr. A annually earns Rs. 3,00,000 (after all deductions) and pays an annual rent of Rs. 1,50,000. In such a case, the deduction allowed would be least of the following;

1. 5000 per month i.e. Rs 60,000 per annum

2. 25% of 3,00,000 i.e. Rs 75,000

3. 1,50,000 minus 10% of 3,00,000 i.e. Rs 1,20,000

Deduction allowed under section 80GG is least of the above i.e. Rs 60,000

Conditions for claiming deduction under Section 80GG for Rent Paid:-

1. Deduction under Section 80GG for Rent paid is only available to an Individual or HUF.

2. The taxpayer is either Self employed or Salaried (but does not receive any benefit of deduction under Section 10(13A) for House Rent Allowance)

3. The taxpayer himself or his spouse or Minor child should not own any accommodation at the place where he is employed or carries on his business or profession.

4. If the taxpayer owns any property at any place other than the place mentioned above, he should not be claiming benefit of that property as self occupied property. That other property would be deemed to be let out.

5. Individual needs to file declaration in form 10BA that he satisfies all the conditions stated above.

Important Note:

As introduced in Budget 2020, if an individual assessee opt for concessional tax rate introduced in budget, then that person should forgone certain exemptions and deductions, House rent allowance and deduction u/s 80GG are covered under that list. Hence, please keep in mind that if that assessee wants to opt for concessional tax rate then do not take advantage of HRA and deduction u/s 80GG.

House Rent Allowance (HRA) Taxability & calculation

Republished with amendments