House Rent Allowance (HRA) is a crucial component of an individual’s salary, aimed at providing financial support for rental housing expenses. Section 10(13A) of the Income Tax Act, 1961, allows salaried employees to claim tax exemption on HRA, thereby reducing their taxable income. In this blog, we will explore the eligibility, exemption calculation, conditions, and important aspects of HRA under Section 10(13A).
What is House Rent Allowance (HRA)?
HRA is a part of a salaried employee’s salary structure, provided by the employer to cover rental accommodation costs. It is a significant tax-saving benefit, as per Section 10(13A) read with Rule 2A of the Income Tax Rules, 1962.
However, not the entire HRA received is exempt from tax. The exemption amount is subject to certain conditions and calculations prescribed by the Income Tax Act.
Eligibility Criteria for HRA Exemption
To claim HRA exemption under Section 10(13A), the following conditions must be met:
- Salaried Employee: The individual must be a salaried employee receiving HRA as a component of their salary.
- Rented Accommodation: The employee must live in rented premises and pay rent to the landlord.
- Rent Payment Proof: Valid rent receipts or rental agreements must be furnished as proof of payment.
- PAN of Landlord: If the annual rent exceeds ₹1,00,000, the landlord’s PAN (Permanent Account Number) must be provided.
- Location of Residence: The tax exemption is calculated based on whether the residence is in a metro city (Delhi, Mumbai, Kolkata, Chennai) or a non-metro city.
HRA Exemption Calculation under Section 10(13A)
The amount of HRA exemption is determined as the least of the following three amounts:
- Actual HRA received from the employer.
- Rent paid minus 10% of salary
(Rent Paid – 10% of Basic Salary + Dearness Allowance, if applicable). - 50% of salary for metro cities or 40% of salary for non-metro cities.
Example Calculation:
Let’s assume an individual has the following salary details:
- Basic Salary: ₹50,000 per month
- HRA Received: ₹20,000 per month
- Rent Paid: ₹15,000 per month
- Location: Mumbai (Metro city)
The HRA exemption will be calculated as follows:
- Actual HRA received: ₹20,000
- Rent paid – 10% of salary: ₹15,000 – ₹5,000 = ₹10,000
- 50% of salary (for metro cities): 50% of ₹50,000 = ₹25,000
HRA Exemption = Least of ₹20,000, ₹10,000, or ₹25,000 = ₹10,000 per month (₹1,20,000 annually).
The balance HRA of ₹10,000 per month (₹1,20,000 annually) will be taxable.
Documents Required for HRA Claim
To claim the HRA exemption, an employee must submit the following:
- Rent Receipts: Properly signed by the landlord with revenue stamp if applicable.
- Rent Agreement: A formal agreement may be required in some cases.
- Landlord’s PAN: If rent exceeds ₹1,00,000 annually.
- Bank Statements: Showing rent payment transactions.
Special Cases in HRA Exemption
1. If an Employee Pays Rent but Does Not Receive HRA
If an employee is paying rent but does not receive HRA, they can still claim a deduction under Section 80GG, subject to conditions.
2. If Living with Parents
An individual can pay rent to their parents and claim an HRA exemption. However, parents must declare this rent as their taxable income.
3. Paying Rent to Spouse
Paying rent to a spouse is not eligible for an HRA exemption, as per various income tax rulings and judgements.
4. Self-Employed Individuals
Self-employed individuals cannot claim HRA under Section 10(13A), but they may claim a deduction under Section 80GG.
HRA Exemption and New Tax Regime
With the introduction of the new tax regime under Section 115BAC, HRA exemption is not available. Taxpayers opting for the new regime must forego deductions, including HRA, to benefit from lower tax rates.
Frequently Asked Questions (FAQs)
Q1: Can I claim HRA exemption if I own a house in another city?
Yes, if you reside in a rented house in a different city for work and pay rent, you can still claim HRA.
Q2: Can both spouses claim HRA separately?
Yes, if both are salaried individuals paying rent, they can claim HRA individually. However, they must ensure that the total rent claimed does not exceed the actual rent paid.
Q3: What happens if I forget to submit rent receipts to my employer?
You can still claim the exemption while filing your Income Tax Return (ITR) by manually entering the eligible amount.
Q4: Is HRA applicable to freelancers?
No, HRA under Section 10(13A) is only for salaried employees. Freelancers and self-employed individuals can claim a deduction under Section 80GG.
Conclusion
Section 10(13A) of the Income Tax Act, 1961, provides a significant tax benefit to salaried employees who live in rented accommodations. Understanding the HRA exemption rules and correctly calculating the exemption amount can help employees maximize tax savings. However, with the introduction of the new tax regime, taxpayers must evaluate whether opting for the old or new tax regime is more beneficial. For personalized tax planning, consulting a Chartered Accountant (CA) or tax expert is always advisable.