Understanding HRA Benefit On Payment Of House Rent

House Rent Allowance (HRA) is a common element in the salary structure for most employees. It is an amount paid to you by your employer as part of your salary. As a taxpayer, you can claim tax benefits on the amount you pay as rent for accommodation each year. This is applicable under Section 10 (13A) of the Income Tax Act.

Who can avail HRA tax benefit?

To be eligible for the tax benefit on HRA, you need to:

  • be a salaried individual,
  • have the HRA component in your salary structure, and
  • stay in a rented accommodation.

But what if you are making payments towards rent for residential accommodation but you do not get HRA from your employer? You can still claim the deduction under Section 80GG of the Income Tax Act. However, for that, you will need to fulfil certain conditions:

  • You need to be salaried or self-employed.
  • You have not received HRA at any point in time during the year for which you have claimed 80GG.
  • Neither you nor your spouse owns any residential accommodation in the place that you currently reside.

Exemption limit

A big question among salaried professionals is: what is the exemption limit on HRA? The exemption on your HRA benefit is the minimum of:

  • The actual HRA received,
  • rent paid annually reduced by 10% of salary,
  • 50% of your basic salary (if you live in a metro city), and
  • 40% of your basic salary (if you live in a non-metro city).

Remember, that the least amount from the above four options is taken into consideration for tax exemption. Therefore, if you want to avail of the maximum benefit, you can discuss it with your employer and restructure your salary in an appropriate manner.

How to calculate HRA?

Let’s take a practical example to understand how HRA exemption is calculated.

Imagine that you are living in Mumbai. You earn a basic salary of Rs 40,000 per month. The HRA component in your salary is Rs 20,000 but the actual rent you pay is Rs 15,000. Here’s how much money is exempted based on the above conditions.

  • Actual HRA received in the year: Rs 20,000 X 12 = Rs 2,40,000
  • Actual rent paid (Rs 15,000 X 12 = Rs 1,80,000) – 10% of salary (Rs 48,000) = Rs 1,32,000
  • 50% of basic salary [(Rs 40,000 X 12) X 50%] = Rs 2,40,000

In this example, Rs 1.32 lakh is the least amount among all the options. Therefore, you will get Rs 1.32 lakh exemption from income tax.

You can claim HRA exemptions by submitting your monthly rent receipts. However, keep in mind that it is mandatory to report the PAN card details of your property owner if you pay more than Rs 1 lakh annually.

How does the new tax regime impact HRA?

You can continue claiming HRA only if you opt for the old tax regime. Remember, the new tax regime does away with all deductions and exemptions with the exception of National Pension Scheme (NPS) deposits (up to Rs.50,000) and interest paid on home loan (up to Rs. 2 lakhs) So, if you have taken a Home Loan and live in rented accommodation currently, do not hesitate to avail of dual tax benefits each year. Besides HRA, also ensure that you have utilised the Section 80C to the fullest by investing in tax-saving products offered by HDFC Bank.

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* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.