HRA: How to compute exemption

This article is all about the House Rent Allowance (HRA). This will cover what is HRA, How is HRA accounted for in the case of a salaried individual and a self-employed professional, What are the dependent factors in calculating HRA exemption, What are the conditions for availing exemption, What is the formula for calculating HRA exemption, What are proof for HRA claim and Examples for calculation of exemption/deduction of HRA.

1. What is House Rent Allowance?

• Employees generally receive a house rent allowance (HRA) from their employers.
• This is a part of the salary package, in accordance with the terms and conditions of employment.
• HRA is given to meet the cost of a rented house taken by the employee for his stay.
• Now a days HRA is given to all employees irrespective of actual rent factor. In most of the cases it is 40% to 50% of basic pay of or 28% (approx.) of CTC and so is the major tax planning factor.
• The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules.

2. HRA calculation for salaried individual and self-employed Individual

Basis	Salaried individual	Self-employed Individual
Tax accounting	Under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules.	Under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.

3. Dependent factors in calculating HRA exemption for salaried individual

Keep four aspects in mind:-

1. HRA received,

2. The actual rent paid and

3. Where you reside, i.e., if it is a metro or non-metro. * caution – place of residence is significant and not place of employment.

4. The place of residence is significant in HRA calculation.

Imp:- The above factors shall be calculated on monthly basis.

Note: Metro cities will cover Mumbai, Kolkata, Delhi or Chennai

4. Conditions for availing exemption of HRA

• He must stays in a rented house.
• He is in receipt of HRA from his employer.
• Employee must actually pay rent for the house which he occupies.

Caution – The rented premises must not be owned by him. In case one stays in an own house, nothing is deductible and the entire amount of HRA received is subject to tax.

5. Formula for calculating HRA exemption

Minimum of the following three options:

1. Actual house rent allowance received from your employer

2. Actual house rent paid by you minus 10% of salary

3. 50% of  salary if house is situated in a metro cities or 40% of salary if house is situated in a non-metro cities

This minimum of above is  allowed as income tax exemption on house rent allowance.

Salary here means basic salary which  includes dearness allowance if the terms of employment provide for it, and commission based on a fixed percentage of turnover achieved by the employee. All the components shall be taken on due basis.

Caution: salary is taxable on due or receipt whichever is earlier (sec 15) but for calculating HRA exemption all components shall be taken only on due basis.

Caution: The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.

6. Can I pay rent to my parents or spouse to avail HRA benefits?

Relationship	parents	Spouse	Children	Other relatives
As per tax rule	No restriction	No restriction	No restriction	No restriction
Tax impact on recipient	To account for the same under ‘Income from other sources’. [Sec 56]	To account for the same under ‘Income from other sources’. [Sec 56]	To account for the same under ‘Income from other sources’. [Sec 56]	To account for the same under ‘Income from other sources’. [Sec 56]
Practical view	Practically possible	In view of the relationship when you take up residence together, you are expected to do so and hence such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny, so steer clear of these.	Practically possible	Practically possible

7. What are proof for HRA claim?

• Proof of rent paid through rent receipts, for which only two need to be submitted, one for the beginning of the year and one towards the end of the financial year.
• It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it etc.
• PAN No of house owner in case rent paid by employee is more than ₹ 100,000. [Circlular No. 08/2013 F.No. 275/192/2013-IT(B) dated 10.10.2013]

8. Can I simultaneously avail tax benefits on my home loan and HRA and also show rental income in my tax return?

No restriction in case you have proper justification for the same.

9. Examples for calculation of exemption/deduction of HRA

X has received following amount during the previous year.

1. Basic Salary – Rs. (5000*12) – Rs. 60,000/-

2. Dearness Allowance (D.A) – Rs. (1000*12) – Rs. 12000/-

3. House Rent Allowance (H.R.A.) – Rs. (2000*12) – Rs. 24000/-

4. Actual Rent Paid – Rs.(2000*12) – Rs. 24000/-

Calculation

The minimum of the following amount shall be exempt

• Actual HRA received (2000*12) – Rs. 24000/-
• Rent Paid in excess of 10% of salary ( 24000-7200) – Rs. 16800
• 40% of Salary – Rs. 28800/-

Therefore, Rs. 16800 shall be exempt and the balance Rs. 7200 shall be included in gross salary.

10. Some Practical cases regarding HRA

There are cases where employees pay their rent in cash and landlord refuses to provide any rent receipts.

What employees do-

Employees prepare rent receipts themselves and do forge signatures. Also there might be cases where employees actually do not pay any rent but still prepares rent receipts.

Legal consequences:-

These all are covered under forgery cases and offences under giving false evidence and fabricating false evidence of IPC (Section 191 & 192).

What employer should do if such cases are identified in his company:-

Sack the employee.

(For any queries author can be reached at eshaag6@gmail.com)

(Republished with Amendments carried out by Taxguru Team)

Also Read :-

Claiming HRA – What to do if landlord do not have PAN

House Rent Allowance – Case Study and Provisions

Download House Rent Allowance (HRA) Calculator

House Rent Allowance (HRA) Taxability & calculation

House Rent Allowance Vs. Rent Free Accommodations