What is House Rent Allowance, HRA Exemption and Tax Deduction?

Many people relocate to a new area in search of employment. Companies typically provide a housing allowance to help employees with this out-of-pocket expense. Thus, the house rent allowance (HRA) affects how much tax you have to pay. 

This article discusses everything you need to know about the HRA exemption and tax deductions.

What is the house rent allowance?

Employees living near their workplace may be eligible for a “rent subsidy.” A rent subsidy, or HRA, is a payment made by your employer to help you with housing. The house rent allowance may be entirely or partially taxable, depending on the circumstances. 

The salary, HRA, rent, and job location determine how much of your paycheck is subject to HRA deductions. The tax breaks associated with HRAs are available to self-employed and salaried individuals.

How to calculate HRA?

When an individual pays rent instead of buying a home, the government allows them to deduct a percentage from the housing rental allowance. You can calculate your HRA refund by using an online salary calculator. The HRA calculator is available on the income tax portal.

The advantages of paying rent can be claimed under Provision 80GG. HRA can be deducted even if you do not have a fixed income or receive HRA.

Guidelines for deducting house rent allowance from your taxes

If you fulfill the requirements of Section 10(13A) of the Income Tax Act, you can deduct your house rent allowance from your taxable income. 

The requirements are as follows:

• A salaried employee and a business owner can take advantage of the HRA tax deduction. However, you must rent a house to be eligible. 
• Housing expenses cannot be included in HRA tax deductions.
• You need to submit a rent receipt as proof that you have paid your rent in full. If your company provides you with an HRA as part of your income, you will not be eligible for tax deductions if you do not pay rent.
• To avoid a tax penalty, employees spending more than INR 1,00,000 per year on rent must include their landlord’s PAN in their tax forms.

HRA tax exemption for salaried individuals

Rule 2A of the Income Tax Act specifies that salaried persons are exempt from paying tax on HRA contributions if they meet certain requirements. Employees must adhere to the company’s policies while claiming their house rent allowance.

How do you determine if the HRA is deductible?

The maximum allowable deduction is calculated as follows:

• Residents of metropolitan cities receive HRA equal to 50% of [base income + discretionary allowance (DA)].
• Residents of non-metropolitan cities receive 40% of [base income + DA].
• Rent paid should not exceed 10% of [annual base income + DA].

What documentation is needed to qualify for an HRA exemption?

To get a deduction from your employer for your house rent allowance, you will need to provide the following:

1. Rent receipts and rental agreements
2. PAN of the home’s owner if the annual rent is higher than Rs 1 lakh

HRA deduction is reflected in form 16.

Factors to take into account when calculating HRA deductions

Some things to keep in mind with HRA tax deductions are as follows:

1. You cannot receive an HRA tax exemption if you pay rent to your spouse.
2. If you have a house loan, you can still take advantage of the tax benefits associated with an HRA.
3. You can claim a house rent allowance if you live with your parents and pay rent. However, you need to show a receipt.

HRA and city compensatory allowance

Employers (government and private) often offer their employees a City Compensatory Allowance (CCA) to help them deal with the increased cost of living.

The CCA is available in major metropolitan areas and Tier 1 cities. CCA is also available to some employees working in a Tier-2 Indian city. The employee’s grade and position on the pay scale are considered. Therefore, it differs from one city to another.

The CCA is meant to offset the higher-than-average housing costs of working in some areas, while the house rent allowance (HRA) covers the costs of renting a home.

Allowances are subject to taxation in both cases. The HRA exemption is up to INR 1,00,000, while the CCA is not.

HRA deduction: how do you get it?

Before, businesses were not obligated to verify whether an employee had legitimate rent costs. However, this resulted in many requesting HRA deductions even though they were not renting properties. Many also requested deductions higher than their actual rent.

Therefore, on June 1, 2017, the Income Tax Act was revised to prevent fraudulent use of the HRA deduction. Some rules are in effect:

• If the rent is more than Rs. 1 lakh per year, the renter must now provide the landlord’s PAN to verify the transaction.
• You need to provide TDS receipts when requesting the house rent allowance perk.
• The taxpayer can live in a place he or she rents and still claim the HRA deduction.
• Assessee can claim deductions under other sections of the Act, such as Section 24, Section 80C, and Section 80EE, in such a circumstance.

Conclusion

Note that to qualify for a tax break, neither you nor your spouse can legally own any residential real estate in the same city. No deduction is permitted if you own any residential property and rent from this property.

If you work in a different city and do not own any property in that city, you may be able to take advantage of the house rent allowance tax deductions. In the case of Section 80GG, however, this option is unavailable. 

House rent allowance is a complicated topic but can be beneficial to understand. If you are still unsure how HRA exemptions work, contact the best financial advisors at Piramal Finance to learn more.