Income Tax Deduction on HRA (House Rent Allowance)

Dec 1st, 20107 Comments

Most of the salaried people get an allowance for taking care of the rent that they pay for their home. This is called House Rent Allowance, or HRA.

HRA gets special treatment in income tax laws, and is exempt from income tax to a certain extent.The HRA deduction is based on salary, HRA received, the actual rent paid and place of residence.

You can claim HRA if you fulfill the following three conditions:

1. HRA allowance should be a part of your salary package.

2. You are staying in a rented accommodation and paying rent for it.

3. The rent exceeds 10 per cent of your salary (BASIC + Dearness Allowance).(Click here to Understand your Salary Components)

How much Income Tax (IT) exemption is available?

The minimum of the following three is available as exemption from your income:

1. The actual HRA received from your employer

2. The actual rent paid by you for the house, minus 10% of your salary (this includes basic + dearness allowance, if any)

3. 50% of your basic salary (if you live in a metro) or 40% of your basic salary (if you live in a non-metro)

Let’s take the following example:

Basic: Rs. 10,000
DA: Rs. 5,000
HRA: Rs. 8,000

Rent paid: Rs. 10,000

You live in Mumbai.

Now let’s evaluate the above rules:

1. The actual HRA received from employer

This is Rs. 8,000

2. The actual rent paid for the house, minus 10% of salary

i.e. Rs. 10,000 – 10% of (Rs. 10,000 + Rs. 5,000) = Rs. 10,000 – Rs. 1,500 =Rs. 8,500

3. 50% (metro cities) / 40%(non metro cities) of your basic salary

Since its a metro city, this would be 50% of Rs. 10,000 = Rs. 5000.

The minimum of 1, 2 and 3 is Rs. 5000. Therefore, the amount of HRA exempt from tax is Rs. 5000 per month.

The remaining HRA amount of Rs. 3000 (Actual HRA received Rs. 8,000 – exempt HRA Rs. 5000 = Rs. 3,000) would be added to your income, and would be subject to income tax.

Who can claim HRA exemption?

There are certain conditions that should be met for claiming IT benefit on HRA.

You can claim HRA exemption towards the rent paid by you, if:

  • You receive HRA as part of your salary
  • You pay the rent
  • You stay in the rented house for which you pay the rent
  • You do not own the house for which you are paying the rent

Thus, for example, you are paying the rent for a house in which your parents stay, but you stay in a different house. Then, you can not claim exemption for that. You yourself should be an occupant of the house.

You can claim rent given to your parents. Let’s say you live with parents and pay them rent. This makes your parents the landlords. One of them will have to declare it in his/ her personal income tax return to prevent litigation in the future.

You cannot claim rent paid to spouse. The relationship between a husband and wife is not commercial in nature; a husband and wife are supposed to stay together. So payment of rent to a spouse will not be accepted by the income tax authorities.

Documents needed to claim HRA exemption

  • Rent receipts
  • Rental agreement

Kevin Gala
info@investinsure.in

7 Responses to “Income Tax Deduction on HRA (House Rent Allowance)”

  1. umesh lamkane says:

    brilliant

  2. Hemant says:

    Nice one :-)

  3. Abhijeet Bonde says:

    very very helpful ….

  4. jayesh shah says:

    Excellent info for everyone

  5. admin says:

    @Everyone : Thanks for the valuable comment

    Regards,
    Kevin Gala

  6. Sunil Dhargalkar says:

    Great info……

  7. Anonymous says:

    good info Kevin Gala…

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