House Rent Allowance rules and regulations

Under House Rent Allowance rules and regulations, you will get exemption up to a minimum of the following  amounts:

  1. Actual House Rent Allowance (HRA) received by the employee in the year.
  2. Rent paid by the employee for his accommodation in excess of 10% of his salary.
  3. 50% of the salary, if he stays in any of the 4 metro cities of Delhi, Mumbai, Kolkata or Chennai; otherwise, 40% of the salary.

The salary for this calculation means the 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.

Please note that if the employee is staying in his own house or not paying any rent, he will not be eligible for the above tax exemption.

House Rent Allowance (HRA) – Factors Deciding Exemption

From the above rules, it is clear that there are 4 factors which decide your eligibility for House Rent Allowance (HRA) exemption. They are:

  1. Actual HRA received by you
  2. Actual Rent paid by you
  3. Your city of residence
  4. Your salary (Basic Pay & DA)

Meaning of salary for the purpose of computing HRA Exemption

  • Salary means (Basic + D.A + Commission based on fixed percentage on turnover).
  • Salary is to be taken on due basis in respect of the period during which the period accommodation is occupied by the employee in the previous year.

Example for calculation of exemption/deduction of HRA

  • X has received following amount during the previous year.
  • Basic Salary – Rs. (9000*12) – Rs. 108000/-
  • Dearness Allowance (D.A) – Rs. 1000*12) – Rs. 12000/-
  • House Rent Allowance (H.R.A.) – Rs. (5000*12) – Rs. 60000/-
  • Actual Rent Paid – Rs.(4000*12) – Rs. 48000/-

Calculation

The minimum of the following amount shall be exempt

  • Actual HRA received (5000*12) – Rs. 60000/-
  • Rent Paid in excess of 10% of salary ( 48000-12000) – Rs. 36000
  • 40% of Salary(In case of other than Metro city) – Rs. 48000/-

Therefore, Rs. 36000 shall be exempt and the balance Rs. 24000 shall be included in gross salary and the same shall taxable.

Frequently Asked Questions on House Rent Allowance (HRA):-

1. What are the dependent factors in calculating HRA for the salaried individual?

When you are calculating HRA for tax exemption, you take into consideration four aspects which includes salary, HRA received, the actual rent paid and where you reside, i.e., if it is a metro or non-metro. If these aspects remain constant through the year, then tax exemption is calculated as a whole annually, if this is subject to change, as in a rent hike, pay hike or shift in residence etc., then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.

The place of residence is significant in HRA calculation as for a metro the tax exemption for HRA is 50% of the basic salary while for non-metros it is 40% of the basic salary. This holds true especially when you work at a metro and reside at a non-metro. In this case, your city of residence only will be considered for calculating your HRA.

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

You can pay rent to your parents, however, they need to pay tax on the same or account the same in calculating their taxable income.

On the other hand, you cannot pay rent to your spouse. 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.

3. Do I need to submit any proof for my HRA claim?

You need to submit 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.

4. Can I simultaneously avail tax benefits on my home loan and HRA?

The tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other. As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc.

5. Is my landlord’s PAN mandatory to claim HRA?

If you pay rent in excess of Rs 1 lakh p.a. then it is necessary to mention PAN details of your landlord in your tax return to claim tax exemption on HRA.

6. My landlord does not have PAN. How do I claim tax deduction on HRA?

It is necessary to get PAN details of your employer to claim tax benefits on HRA. However, if your landlord does not have a PAN then you must get a declaration from him regarding the same. It is better that you get these details (PAN or declaration) before you take place on rent in order to avoid hassles at the time of filing return.

Author Bio

Qualification: CA in Practice
Company: S Solanki & Co
Location: Central Delhi, New Delhi, IN
Member Since: 23 Dec 2018 | Total Posts: 1

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