Understanding Income Tax on House Rent Allowance

Many of the people work outside their hometown to earn their livelihood, every one of them not have the facility or resources to purchase homes in every cities they work.

Skyrocketing real estate prices have made these individuals to stay in rented properties as per their choice of location and affordability.

Nowadays in major metropolitan cities of India like Mumbai or Delhi staying in rented accommodation does not comes cheap, in prime locations per month rent can go in thousands of rupees per month, this is a major expenditure for the families.

The need for a rebate in the tax is the requirement of many such individuals who can’t afford the burden of paying such high rents and then also paying a tax on their yearly income.

The government of India has taken note of this and given exemptions in income tax on the housing rent paid in the relevant assessment year. This exemption is a legal and authentic way to save income tax for many individuals who stay in rented properties.

Point to be noted is the exemption is not at all applicable if the individual is not paying rent for the property he is staying in and living in his own or some relative house.

Check out Taxmann’s Income Tax Act Book by Taxmann.

In this article we will shed light on the details of housing rent allowance as a component of the salary of individuals and various rules regarding exemption on the same so that a clear understanding can be developed regarding this issue.  

House Rent Allowance or HRA is one of the component of the salary provided by the employer for the expenses incurred towards rented accommodation. Although a part of the salary, unlike some other components this portion is not fully taxable. Subject to other terms and conditions a part of housing rent allowance is exempted under Section 10 (13A) of the income tax act 1961.

Amount of the rent allowance exemption is deducted from the total income before arriving at a taxable income. The eligibility of any salaried employee can claim HRA if they satisfy the following condition:

  • HRA allowance is part of the remuneration offered to the employee.                                      
  • The employee is staying in a rented accommodation and paying rent for the same. Only salaried employees can avail the exemption and self-employed professionals cannot.
  • The rent paid is more than 10% of the salary received from the employer.

The exemption on the HRA is least of the below mentioned (1) Actual allowance received by the employer (2) 50% of the salary for people staying in metro cities like Delhi, Mumbai, Kolkata and Chennai and 40% for non-metro cities (3) Excess of rent paid per year over and above 10% of yearly remuneration i.e. actual rent paid less 10% of basic salary.

The salary considered is the basic salary of the individual and dearness allowance forming the part of retirement benefits and commission received on basis of sales can be added to calculate the minimum exemption available under the HRA.

Moreover husband and wife if both are paying the rent for the house the family stays, then both can claim HRA benefit separately for their respective share paid keeping in mind that the rent claimed by both should not exceed 20K.

Individuals have to keep in mind that rent receipt or rent agreement with the landlord is a mandatory document for claiming HRA. It is important and necessary to present rent receipts to the company you are working for claiming HRA if you/employee receive HRA in excess of Rs 3000 per month. It is also required to present the PAN of the landlord to the employer if the rent paid is more than 1 lakh rupees per month annually.

By the help on an example we will try to clear the things discussed above. Suppose a salaried individual named Ramesh is staying in Mumbai Ghatkopar area in a rented property for which he is paying a rent of 12k per month.

His basic salary is 20k and receives an HRA of 8k from his employer. As per the guidelines issued by finance ministry the tax rate applicable is 20% of his income.

For the exemption purposes under HRA the least of the following amount as shown below will be applicable annually. (a) Actual HRA received per year which is 96k (b) 50% of 2 Lakh 40 thousand for metro city which comes as 1 Lakh 20 thousand (c) Excess of rent paid per year over 10% of annual salary which is (144000)-(10% of 240000) = 1 Lakh 20 thousand.

In this way we can see in this case the total HRA received by Ramesh is exempted from tax as per above calculations. This is not the case every time, in some cases the tax exempted can be on the portion of the HRA and rest amount is added to the individual’s taxable income.

In special cases like if paying rent to family member exemption can be seeked but documentary evidence should be there as it can attract scrutiny of IT department.

Also individuals who pay rent but not get paid HRA component from their employer, and non-salaried people staying in rented properties can also claim deduction under section 80GG of the income tax act. For this they need to furnish form 10B while filing their income tax for the particular assessment year.

In this age of high inflation everyone should be looking towards legitimate ways of saving tax and have apt knowledge to save money regarding this context.

Sharing is caring!