Are you aware that maximizing your House Rent Allowance (HRA) can result in saving a considerable amount of money on your income tax? In this comprehensive guide, we will explore everything you need to know to make the most of your HRA.
This guide will familiarize you with what HRA entails, its benefits and how to claim it. Next, we will dive into how to calculate HRA based on certain factors, before exploring ways to maximize your HRA.
Note that if you opt for the new tax regime from FY 2020-21 (AY 2021-22), you will not be eligible for tax exemption on house rent allowance.
Table of Contents
Understanding HRA : Another employee benefit from your CTC
House Rent Allowance (HRA) is a common component of salaried individuals’ pay structure. It is an essential part of salary that employees receive from their employers to cover their housing rental expenses. HRA is of great significance as it provides a good opportunity to save taxes.
HRA allows salaried employees to claim a deduction on the rent paid for the accommodation they are staying in. The Indian Income Tax Act provides tax benefits on the HRA component of the salary under Section 10 (13A). The amount of HRA exemption is based on the actual rent paid by the employee and the salary structure.
Benefits of HRA
House Rent Allowance has multiple benefits for salaried individuals. First and foremost, it helps in reducing the tax liability of employees. HRA not only reduces taxable income but also helps in taking advantage of tax exemptions. Secondly, it provides relief from the financial burden of paying rent. This allowance is especially valuable for people staying in metropolitan cities where rents are soaring high.
How to claim HRA?
To claim HRA, salaried individuals need to submit rent receipts to their employers. Usually, the employer’s HR department has a specific format that employees need to follow while submitting rent receipts. Further, employees must be prepared with important documents such as rent agreement, PAN card of landlord (check FAQ to read when landlord’s PAN is needed), and other relevant documents for verification purposes.
How to calculate HRA?
The HRA amount depends on various factors such as the employee’s basic salary, dearness allowance, and the city in which they work.
The calculation method determines the minimum of three amounts –
- Actual HRA received by the employee
- 50% of Basic Salary and Dearness Allowance if residing in metro cities/ 40% of Basic Salary + Dearness Allowance if staying in non-metro cities.
- Actual rent paid (-) 10% of basic salary + Dearness Allowance
What if you don’t receive an Housing Rent Allowance?
If you are paying rent for your residential accommodation but do not receive an HRA from your employer, you can still avail of the deduction under Section 80GG. To qualify for this deduction, the following conditions must be met:
- You can be either self-employed or salaried.
- You should not have received HRA at any point during the year for which you are claiming the deduction.
- You, your spouse, minor child, or the Hindu Undivided Family (HUF) you are a member of should not own any residential property at the location where you currently reside, perform office duties, carry out employment, or conduct business or profession.
In case you own any residential property other than the one mentioned above, you cannot claim it as self-occupied. Instead, it will be considered as let out for the purpose of claiming the 80GG deduction.
Maximizing HRA Benefits
The Housing Rent Allowance is a significant tax-saving investment for individuals, particularly those living in rented properties. When it comes to maximizing this allowance, taxpayers can use a few simple strategies to save money on their taxes.
Rent receipts are essential documentation for claiming HRA. If you are paying rent, make sure to ask for rent receipts from your landlord and keep them organized and readily available. Providing these receipts to your employer will help you claim the maximum deduction possible under your allowance.
How to claim HRA benefits when living with parents?
For individuals paying rent to family members, the allowance can still be claimed but comes with a few caveats. This payment needs to be legitimate, and the family member receiving rent should include the amount received in their income tax return to comply with rules.
Another approach to maximizing your HRA is to claim it simultaneously with a home loan. Individuals who own a house but reside in another city due to work can claim both the allowance and a home loan simultaneously. However, the tax benefits can only be claimed if the taxpayer is not living in their property.
Opting for a flexible salary structure can aid you to maximize your HRA. By negotiating a salary structure with your employer that offers wiggle room for HRA allocation, you can improve your tax savings.
In conclusion, while claiming HRA and saving money on taxes can be a complicated process, organizing your rent receipts, paying rent to family members legally, and negotiating a flexible salary structure can optimize your savings.
Tax Implications of HRA
Tax Implications of HRA As we have understood the concept of HRA, it is essential to know its tax implications. HRA is partially taxable, and the amount of tax varies based on factors such as your salary structure, location of residence, and the amount of rent you pay, among others.
It is essential to note the difference between HRA and home loan deduction. While HRA is taxable based on specific rules, home loan deduction is available under different sections of the Income Tax Act. One can claim deductions up to INR 2 lakh under Section 24 of the Income Tax Act, subject to some conditions.
Income tax slabs also play a significant role in determining the impact of HRA on your finances. For instance, if you fall in the lower income tax slab, the HRA deduction can significantly benefit you.
Conclusion
Understanding the tax implications of HRA is critical to make the most out of the allowance you receive. You can also consult a tax expert to help you navigate your finances more efficiently.
To maximize your allowance, it’s important to keep accurate records of your rent payments, claim HRA and home loan simultaneously, and choose a flexible salary structure. Understanding factors that affect your allowance and tax implications will help you make informed decisions. Don’t forget to keep rent receipts and submit them before the deadline to claim your HRA. By being aware of these tips and tricks, you can make the most of your HRA and reduce your tax burden. Happy savings!
Also read our detailed article on Group Health Insurance
FAQs
You must be having a ton of questions about HRA and how it works. We’ve gathered some of the most commonly asked questions to provide the answers you need.
1. What is the maximum HRA?
The maximum HRA you can claim is the minimum amount of the following three parameters:
a) 50% of your basic salary, for those living in metro cities.
b) 40% of your basic salary for those living in non-metro cities.
c) Your actual rent minus 10% of your basic salary.
2. What is the deadline to submit HRA rent receipts?
It is best to submit rent receipts to your employer on a monthly or quarterly basis to avoid any last-minute rush. Employers usually require rent receipts before the end of the financial year.
3. Can I claim HRA if I work from home?
No, you cannot claim HRA if you work from a home that you own. HRA is only for individuals who pay rent for a residential accommodation they occupy.
4. Do I need rent receipts for claiming HRA?
Yes, you need to provide rent receipts to claim HRA. These receipts should contain essential information such as the landlord’s name, rental period, and the rent amount paid.
5. Can I claim HRA for rent paid to parents?
Yes, you can claim HRA for rent paid to your parents, but you need to establish a landlord-renter relationship. Ensure that your parents include the rental income in their tax returns to avoid any legal complications.
6. When do you need a landlord’s PAN?
If you have taken a house on rent and are making a payment of over Rs.1 lakh annually – you need to provide the landlord’s PAN. Land without a PAN must sign a self declaration stating he does not have a PAN, as per circular No. 8/2013 dated 10 October 2013.
7. What if your landlord is an NRI?
Tenants paying rent to NRI landlords must remember to deduct TDS of30% before making the payment towards rent.
8. How to submit HRA proof for ITR?
To avail of a deduction for the house rent allowance (HRA), certain documents such as rent receipts and rental agreements need to be provided to the employer. Additionally, if the annual rent payment exceeds Rs 1 lakh, the landlord’s PAN (Permanent Account Number) must also be submitted. Based on these supporting documents, employers will issue Form 16, which includes the exemption for HRA.
9. What occurs if evidence for the exemption of House Rent Allowance is not furnished to the employer or if the HRA deduction is not claimed in the Income Tax Return (ITR)?
If you inadvertently fail to submit rent receipts or a rental agreement to your employer when providing proof, you still have the option to claim the HRA deduction when filing your ITR.
However, if you overlook claiming the HRA deduction in your original return, you have the opportunity to file a revised return to rectify the mistake. This can be done before the earlier of the 31st of December of the assessment year or the completion of the assessment.
10. How to claim deduction under Section 80GG?
The least of the following amounts will be exempted from tax:
Rs. 5,000 per month.
25% of the adjusted total income.
The actual rent paid, provided it is less than 10% of the adjusted total income.
*Adjusted total income refers to the total income minus any deductions under Section 80GG.
11. Can self-employed individual claim an HRA exemption?
The exemption for House Rent Allowance (HRA) cannot be claimed by self-employed individuals. Only individuals who are employed and receive a salary package that includes an HRA component are eligible to claim the HRA exemption.
In summary, HRA is a great way to save tax on your rented accommodation. Keep your rent receipts handy and ensure you claim the maximum HRA possible.
