House Rent Allowance or HRA forms a salary component of most of the salaried individuals. For those living in rented accommodation it can help them save tax. Are you wondering how you can save tax through HRA deduction?
House rent allowance (HRA) is one of the important components of your salary. All employers have to provide HRA as compensation for house rental expenses. However, most of us are not aware of the fact that we can also save tax on it. The HRA amount is decided based on factors like the employee’s salary structure, actual salary and the city in which he/she is residing.
What is HRA
The full form of HRA is House Rent Allowance, which often forms a key taxable component of a salary slip. It refers to the amount paid by an employer to his/her employee to meet the cost of living in a rented accommodation.
HRA not only helps you manage the expenses incurred on a rented house, but also helps you save on your total tax outgo. Let us understand the eligibility criteria to claim HRA deduction and its calculation in the following sections.
Who Can Claim Tax Deduction on HRA – Eligibility Criteria
A part of HRA can be claimed as a tax deduction according to Section 10(13A) of the Income Tax Act, if the following eligibility criteria are met:
- You should be a salaried individual.
- You should receive HRA as a salary component.
- You should live in a rented house.
- You should be actually paying house rent, i.e., the rent receipts should be issued in your name.
How is House Rent Allowance (HRA) Calculated
The amount of tax deduction that can be claimed over HRA is the least of the following:
- Actual rent paid minus 10% of the basic salary, or
- Actual HRA offered by the employer, or
- 50% of salary when residential house is situated in Mumbai, Delhi, Chennai or Kolkata; 40% of salary when residential house is situated elsewhere
NOTE: Salary refers to the sum of basic salary, dearness allowance (DA) and any other commissions, if applicable for the purpose of HRA calculation.
For Example:
Mr. A, who lives in a rented house, works as a salaried employee in Delhi. He pays a monthly rent of Rs. 12,000 and receives a monthly HRA of Rs. 15,000. Now, let us understand how much tax deduction he can claim on the basis of this allowance.
The following table shows the salary structure for Mr. A.
| Salary Component | Amount (Rs.) |
| Basic | 23,000 |
| HRA | 15,000 |
| Conveyance | 3,000 |
| Medical Allowance | 1,250 |
| Special Allowance | 2,300 |
| Total | 44,550 |
The amount of tax deduction that can be claimed will be the least of the following:
- (Actual rent paid) – (10% of the basic salary) = Rs. 12,000 – (10% of Rs. 23,000) = Rs. 9,700; or
- Actual HRA offered by the employer = Rs. 15,000; or
- 50% of the basic salary = 50% of Rs. 23,000 = Rs. 11,500.
The least of the above three is the actual amount paid as rent minus 10% of the basic salary. Hence, Mr. A will get an HRA exemption of Rs 9,700 on his total taxable income.
Section 80GG – How to Save Tax If You Don’t Receive HRA
The maximum amount of deduction that can be claimed under Section 80GG of the Income Tax Act corresponds to the least of the following:
- Rs. 5,000 per month (Rs. 60,000 per year); or
- 25% of your gross total income; or
- (Actual rent paid) – 10% of total income
Criteria for Calculation of HRA
the House Rent Allowance is decided based on the salary. However, some other factors also affect HRA, such as the city in which the employee resides.
- In case the individual lives in a metro city, then he is entitled to a House rent allowance equal to 50% of the salary.
- For cities other than a metro, the entitlement is 40% of the salary.
The salary is specified as the sum of the basic salary, dearness allowances and any other commissions to calculate the House Rent Allowance, In case an employee does not receive a commission or a dearness allowance, then the house rent allowance will be around 40% – 50% of his/her basic salary.
Note: The tax benefit is available to the person only for the period in which the rented house is occupied.
HRA for Central Government Employees
For the Central Government employees, the minimum and maximum house rent allowance in different cities were recently modified in 2017 as per the recommendations of the Seventh Pay Commission. For the HRA calculation purpose, cities have been divided into three parts such as X, Y and Z.
City Category | Population | HRA Calculation (as a percentage of salary) | Minimum HRA (in Rs) |
X | Above 50 lakh | 30% | Rs.5400 |
Y | 5 lakh to 50 lakh | 20% | Rs.3600 |
| Z | Below 5 lakh | 10% | Rs.1800 |
The case, as mentioned above, is when the Dearness Allowance crosses 100% of the salary. In case it crosses 50%, the HRA percentage will be 27%, 18% and 9% for X, Y and Z cities, respectively.
HRA Claim Rules
- The allotted HRA cannot exceed more than 50% of the basic salary.
- As a salaried employee, the person cannot claim for the full rental amount he/she is paying. The exemption will be based on the least of the below-mentioned options:
- 50% of salary, when the residential house is situated at Mumbai, Kolkata, Delhi or
- Chennai and 40% of salary where residential house is situated at any other place.
- HRA received by the employee in respect of the period during which the employee and rent occupy rental accommodation is incurred by the employee during the previous year.
- Rent paid in excess of 10% of salary. The employee can also avail tax benefits of HRA along with a home loan.
- In case a person stays with his parents, he is eligible to pay rent to his parents and collect a receipt for the HRA claim. However, similar rules don’t allow him to pay rent t his spouse and claim a tax exemption.
- If the annual rent of the accommodation exceeds Rs.1 lack, then the landlord’s PAN card is essential. In case the landlord does not have a PAN, he/she can furnish a self-declaration.
- Another important rule is that, if your landlord is an NRI, you have to deduct 30% tax from the rent amount that requires to be declared.
FAQs
Can I claim HRA as a tax deduction, even if I own a house?
Yes, you can claim HRA even if you own a house, provided you meet the eligibility criteria listed above. For example, you own a house in Kolkata but live in a rented apartment in Delhi. In this case you can claim tax deduction on the amount of HRA received as a salary component.
What works as a proof of rent paid by me during the year?
You must keep the receipts of rent paid during the year. The same has to be produced at the time of filing Income Tax Returns (ITR). In case, rent receipt is not available, you will be required to file your lease agreement along with the bank statement that shows rent paid.
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