Salaried individuals residing in rented house are entitled to tax exemption on House Rent Allowance (HRA) under Section 10(13A) of the Income Tax Act, 1961. But are you aware of the fact that you, as a salaried individual can take advantage of this exemption while staying at your parents’ home. Read this blog, to know more!
Provisions under the Income Tax Act related to HRA
As per the Income Tax laws, if the individual is of the age of majority i.e., 18 years and above, and is not dependent upon his parents, then he is considered as a separate taxpayer in the eyes of law. The income calculation varies from income to income and therefore, the amount of HRA will also vary.
Conditions to be fulfilled to avail HRA Tax Exemption if you are living at your parents’ house
1. House should be in the name of the parent(s)
The salaried individual is to be shown as tenant in the parents’ house. Since the rent is to be paid to the owner of the house, the parents must own it. The house can be in the name of one or both the parents.
2. The payment of rent should be sent directly in bank account or cheque in the name of parent(s)
In order to claim the exemption of HRA this way, the salaried must have strong proofs of rent actually being paid to the parent(s). In such a case, the bank transfers or money transferred through cheque plays an important role.
3. You need to enter into rent agreement with your parent(s)
In order to claim HRA while living in the parents’ house, the salaried individual must enter into rent agreement with his or her parent(s), who are the owner of the house,
4. The rental income will be included in the total income of your parents
The rent that is paid to the parents is taxable for them under the head ‘income from house property.’ They can claim property taxes paid by them and also claim a 30% standard deduction from this rental income.
If the parents are in a lower tax bracket than the salaried individual claiming the HRA exemption, the family can save tax as a whole. If they are more than 60 years old, they will also enjoy a higher minimum income exemption limit (Rs. 3 lacs for those who are aged above 60 years old and Rs. 5 lacs for those who are aged above 80 years old). In case they do not have any taxable income, you will be able to save significant tax as a family.
How much tax can be saved on House Rent?
The amount of HRA that can be claimed as an exemption is the least of the following:
- Actual HRA received/
- 50% of (Basic Salary + Dearness Allowance) for metro cities or 40% (Basic Salary + Dearness Allowance) of salary for non metro cities
- Rent paid (-) 10% of salary
Documents required to claim House Rent Allowance
- Rent receipt, if the rent exceeds ₹3,000/month.
- PAN of the landlord, if the rent exceeds ₹1 lac/annum.
Illustration
Case 1: Karan is a salaried individual working and residing in Delhi
| Basic salary + Dearness Allowance | Rs. 3,00,000/- |
| Rent paid | Rs. 1,60,000/- |
| Actual House Rent Allowance Received (A) | Rs. 1,40,000/- |
| 50% of salary for metro cities (B) | Rs. 1,50,000/- |
| Rent paid (-) 10% of (Basic Salary + DA) (C) | Rs. 1,30,000/- |
Tax exemption (minimum of A, B, C) for salaried individual in metro city = ₹1,30,000/-
Case 2: Arjun is a salaried individual working and residing in Jalandhar
| Basic salary + Dearness Allowance | Rs.3,00,000/- |
| Rent paid | Rs.1,00,000/- |
| Actual House Rent Allowance Received (A) | Rs.1,10,000/- |
| 50% of salary for metro cities (B) | Rs.1,20,000/- |
| Rent paid (-) 10% of (Basic Salary + DA) (C) | Rs.70,000/- |
Tax exemption (minimum of A, B, C) for salaried individual in non-metro city = ₹70,000/-
Important Note:
- HRA exemption can be availed only by salaried individuals.
- HRA cannot be claimed if the house is in the name of the spouse because as per the Income Tax Act, the husband and the wife live together.
- HRA is not available under the New Tax Regime
- You can claim both HRA and home loan deduction of ₹ 1.5 lakh against principal repayment and ₹ 2 lakh against interest paid, if you are staying in a different city due to job posting.
- Even if HRA is not part of your salary, you can claim an HRA deduction under Section 80GG. This Section is applicable for those who do not receive HRA as part of their salary and self-employed individuals.
Author Bio
50% of salary for metro cities (B)———–40% (Basic Salary + Dearness Allowance) of salary for non metro cities Case 2: is wrong