According to rule 2A of the Income Tax Rules, HRA for salaried individuals is accounted for under section 10 (13A) of the Income Tax Act.
Similar to this, self-employed people are not taken into account for HRA exemption under this provision but may still be eligible for tax benefits under section 80GG of the Income Tax Act.
What is HRA (House Rent Allowance)
House Rent Allowance is an allowance given by an employer to an employee to cover the cost of living in rented housing.
HRA is not entirely taxable, even though it is a part of your salary. A portion of HRA is excluded from taxation under Section 10 (13A) of the Income Tax Act of 1961, subject to some provisions.
Until calculating taxable income, the sum of HRA exemption is deducted from the overall income, which allows an individual to save money on taxes.
However, bear in mind that if an employee lives in his or her own home and does not pay rent, the HRA collected from his or her employer is entirely taxable.
Is HRA Taxable?
Who can avail of HRA?
This tax incentive is only applicable to salaried people who have an HRA portion of their pay structure and live in rental housing. The allowance is not available to self-employed workers.
HRA for the Self-Employed
As per the Income Tax Act regulations, self-employed individuals cannot claim HRA, but they certainly can avail of tax deductions towards the rented housing under Section 80GG.
HRA for Salaried Individuals
According to Section 10 (13A), rule number 2A of the Income Tax Act, salaried individuals can claim exemptions for HRA.
How to Claim HRA Exemption?
- Live in rented accommodation.
- Receive HRA as part of your CTC
- Submit valid rent receipts and proof of rent payments.
- The HRA exemption calculation will depend on various factors like salary, rent paid, HRA received by the employee and city of residence of employee.
How to Calculate HRA Exemption?
The lowest of the following can be claimed by an individual as an HRA exemption:
- Actual HRA received
- Actual rent paid (-) 10% of basic salary + Dearness Allowance
- 50% of [Basic Salary + Dearness Allowance] for those living in metro cities (Delhi, Mumbai, Kolkata, Chennai)
- 40% of [Basic Salary + Dearness Allowance] for those living in non-metros
Example of HRA Calculation
Consider the situation of Mr. Shiva, a salaried person who lives in Mumbai. He pays a monthly rent of Rs.10,000 for his leased accommodation. This equates to Rs.1.2 lakh per year. His monthly earnings as seen in the table below:
Per month, he has a PF of Rs.2,000 and a technical tax of Rs.200 deducted from his pay.
In Mr. Shiva’s case, the tax-free portion of his HRA will be the lowest of the following, based on his annual earnings:
| Basic Salary | Rs.30,000 |
| HRA | Rs.13,000 |
| Conveyance Allowance | Rs.2,000 |
| Special Allowance | Rs.3,000 |
| Leave Travel Allowance (LTA) | Rs.5,000 |
| Total Earnings | Rs.53,000 |
Mr. Shiva will receive Rs.84,000 in tax exemption on HRA since it is the lowest value above. The remainder of his HRA will be taxed according to his income tax bracket.
| Actual HRA element of salary: | Rs.13,000 into 12 = Rs.1.56 lakh |
| 50% of basic salary, as he stays in Mumbai: | 50% into Rs.30,000 into 12 = Rs.1.80 lakh |
| Actual rent paid minus 10% in basic salary: | (Rs.10,000 into 12) – (10% into Rs.30,000 into 12) = Rs.1.2 lakh – Rs.36,000 = |
Documents Required for HRA Deduction
Here is the list of documents required for HRA exemption-
- An employee is required to furnish PAN card details and a copy of the landlord/property owner if the rent paid during the given financial year is more than Rs1,00,000 in order to claim HRA tax exemption.
- The receipts of rent paid by the employee. Note that the receipts should include the Date and Name of the landlord, PAN card details of the landlord, Name of the tenant, Address of the rented house, Duration of stay, revenue stamp, Signature of the landlord on the revenue stamp, etc.
FAQs
How to submit HRA proof for Income Tax Return?
You will be required to furnish documents like rent receipts and rental agreements to the employer to claim HRA exemption. If the rent payment exceeds Rs 1 lakh p.a., then the PAN of the landlord is required to be submitted.
What is the maximum limit for HRA?
As per Section 10(13A), an employee is eligible to claim a House Rent Allowance deduction maximum up to the actual HRA component that is received from his/her employer.