If you’re earning a salary and living in a rented home, you can benefit from the House Rent Allowance (HRA) under Section 10(13A) of the Income Tax Act, 1961. But did you know that you can still claim this allowance even if you’re residing with your parents? Read on to find out how!
House Rent Allowance (HRA) is a key component of many employees’ salary structures and offers significant tax benefits. The primary condition to claim HRA is that the employee must actually incur rent expenses. Interestingly, this provision extends to situations where an individual stays in a home owned by their parents.
Here’s how it works, If you contribute to household expenses or pay rent to your parents, you can still claim HRA.
HRA Provisions Under The Income Tax Act
According to the Income Tax laws, if an individual is of the age of majority, i.e., 18 years and above, and is not dependent on their parents, they are considered a separate taxpayer. This distinction is crucial because it means that for tax purposes, the individual’s income and deductions are assessed independently from those of their parents.
The calculation of income for tax purposes can vary significantly depending on the nature and sources of income. Consequently, the amount of House Rent Allowance (HRA) an individual can claim also varies based on several factors.
Conditions for Claiming HRA While Staying with Your Parents:
1. House Ownership: The house must be in the name of either or both of the parents. The individual earning a salary must pay rent to the owner, thereby establishing a landlord-tenant relationship.
2. Proof of Rent Payment: To claim HRA, the individual must have strong proof of rent payments to their parents. Bank transfers or cheque payments are crucial as they provide verifiable evidence of these transactions.
3. Rental Agreement: The individual must enter into a rental agreement with their parents, who are the owners of the house, to claim HRA while living with them.
4. Parents’ Taxable Income: The rent received by the parents is taxable under ‘income from house property.’ They can claim property taxes paid and also a 30% standard deduction on this rental income. If the parents are in a lower tax bracket than the individual claiming HRA, the family as a whole can save on taxes. Parents over 60 years of age benefit from a higher income exemption limit (Rs. 3 lakhs for those over 60 and Rs. 5 lakhs for those over 80). If the parents have no taxable income, the individual can achieve significant tax savings for the family.
How Much Tax Can Be Saved on House Rent?
The amount of House Rent Allowance (HRA) that can be claimed as an exemption is determined by the least of the following three criteria:
1. Actual HRA Received: This is the total amount of HRA that is provided by the employer as part of your salary package.
2. Percentage of Salary for City Type:
• For individuals living in metro cities (Delhi, Mumbai, Kolkata, and Chennai), it is 50% of the sum of the Basic Salary and Dearness Allowance (DA).
• For those living in non-metro cities, it is 40% of the sum of the Basic Salary and DA.
3. Excess of Rent Paid Over 10% of Salary: This is calculated by taking the total rent paid and subtracting 10% of the Basic Salary and DA.
The least amount calculated from these three criteria is the maximum HRA exemption you can claim. This method ensures that the exemption is tailored to your specific salary structure and living situation, potentially providing substantial tax savings.
Documents Required to Claim House Rent Allowance (HRA):
• Rent Receipt: If your monthly rent exceeds ₹3,000, you need to provide a rent receipt. This receipt should ideally include details such as the amount paid, the period for which the rent is paid, the address of the rented property, and the signature of the landlord.
• PAN of the Landlord: If the annual rent exceeds ₹1 lakh, you must also furnish the Permanent Account Number (PAN) of the landlord. This is necessary for verification purposes by the tax authorities.
Illustration
Case Study 1: Ananya’s HRA Calculation
Ananya is an individual earning a salary and residing in Mumbai. Here are the details of her salary and rent payments:
• Annual Basic Salary + Dearness Allowance (DA): ₹4,50,000
• Monthly Rent Payment: ₹2,40,000
• Actual House Rent Allowance (HRA) Received: ₹2,00,000
To determine the HRA exemption, we need to calculate the following three amounts and take the least of them:
1. Actual HRA Received (A): ₹2,00,000
2. 50% of Basic Salary + DA for Metro Cities (B): Since Mumbai is a metro city, we take 50% of ₹4,50,000, which is ₹2,25,000.
3. Rent Paid Minus 10% of Basic Salary + DA (C):
The calculation is as follows:
• Annual Rent Paid: ₹2,40,000 × 12 = ₹2,88,000
• 10% of Basic Salary + DA: 10% of ₹4,50,000 = ₹45,000
• Rent Paid Minus 10% of Basic Salary + DA: ₹2,88,000 – ₹45,000 = ₹2,43,000
Now, we compare the three amounts:
• Actual HRA Received (A): ₹2,00,000
• 50% of Basic Salary + DA for Metro Cities (B): ₹2,25,000
• Rent Paid Minus 10% of Basic Salary + DA (C): ₹2,43,000
The minimum of these three amounts is ₹2,00,000. Therefore, Ananya can claim a tax exemption on her HRA of ₹2,00,000 for the year.
Case Study 2: Riya’s HRA Calculation
Riya is an individual earning a salary and residing in Chandigarh. Here are the details of her salary and rent payments:
• Basic Salary + Dearness Allowance (DA): ₹4,00,000
• Annual Rent Payment: ₹1,20,000
• Actual House Rent Allowance (HRA) Received: ₹1,30,000
To determine the HRA exemption, we need to calculate the following three amounts and take the least of them:
1. Actual HRA Received (A): ₹1,30,000
2. 50% of Basic Salary + DA for Non-Metro Cities (B): Since Chandigarh is a non-metro city, we take 50% of ₹4,00,000, which is ₹2,00,000.
3. Rent Paid Minus 10% of Basic Salary + DA (C):
The calculation is as follows:
• Rent Paid: ₹1,20,000
• 10% of Basic Salary + DA: 10% of ₹4,00,000 = ₹40,000
• Rent Paid Minus 10% of Basic Salary + DA: ₹1,20,000 – ₹40,000 = ₹80,000
Now, we compare the three amounts:
• Actual HRA Received (A): ₹1,30,000
• 50% of Basic Salary + DA for Non-Metro Cities (B): ₹2,00,000
• Rent Paid Minus 10% of Basic Salary + DA (C): ₹80,000
The minimum of these three amounts is ₹80,000. Therefore, Riya can claim a tax exemption on her HRA of ₹80,000 for the year.
This calculation ensures that Riya can optimize her tax savings based on her salary and rent payments while residing in a non-metro city like Chandigarh.
Important Note: Claiming HRA While Staying at Parents’ House
• Only individuals with income from salary are eligible to claim HRA.
• HRA cannot be claimed if the house is registered in the spouse’s name, as per the Income Tax Act, considering the husband and wife to reside together.
• HRA benefits are not available under the New Tax Regime.
• If you are staying in a different city due to a job posting, you can claim both HRA and home loan deductions. This includes deductions of up to ₹1.5 lakh against principal repayment and ₹2 lakh against interest payments.
• Even if HRA is not a component of your salary, you can still claim deductions under Section 80GG. This section applies to individuals who do not receive HRA as part of their salary and to self-employed individuals.
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Can anyone provide detailed exemptions from income from salary