How to Claim Tax Exemptions on House Rent Allowance

India’s almost one fourth population belongs to salaried category. Most of the salaried employees get House Rent Allowance as part of their salary. Many of them are aware about the concept of HRA but do not know how it is calculated and how it should be claimed during tax filing. Employees can claim the amount when they stay on rental basis. This reduces the tax amount partially or wholly.

So Let us understand what HRA is all about and how to claim House Rent Allowance

House Rent Allowance is a component of salary which is paid by employers for meeting the accommodation requirements of employees. Salaried and Self Employed people get the benefit of HRA. House Rent Allowance is part of section 10 (13A) of the Income Tax Act. Self Employed people are eligible for the benefit of HRA under section 80GG of Income Tax Act.

There are certain rules which needs to be followed for claiming HRA

1. For employees who are residing in non-metropolitan cities, 40% of the basic pay is determined as HRA and for those residing in metropolitan cities 50% of the basic pay is determined as HRA.
2. In order to avail HRA it is not necessary that the rent should be paid to landlord only. Individuals can pay rent to their parents. But relevant receipts should be available to claim HRA.
3. However, rent paid to spouse cannot be claimed under HRA as it is not permissible under the income tax law.
4. Pan card details need to be submitted so that relevant tax deductions can be made. Pan details of the landlord are required only if rent paid exceeds Rs one Lakh per annum. 

HRA Calculation

Three Factors are very important for HRA calculation

1. The actual rent paid minus 10% of your basic salary.
2. The actual amount of HRA given to you.
3. 50% of your basic salary (for a metropolitan city). 40% for Non Metro City

How to Calculate House Rent Allowance?

Let us understand this concept with an example. Mrs. Sonia lives in Mumbai and is salaried individual. She stays in a rented house for which she pays Rs 10000 as rent. Let us have a look at her salary structure

Apart from this professional tax of Rs 200 and a Provident Fund of Rs 1500 are also deducted from her salary.

So as per the three basic criteria

The actual rent paid minus 10% of your basic salary. = (10000*12)-30000 =Rs 90,000/-

2. The actual amount of HRA given to you. = Rs 1, 44,000/-
3. 50% of your basic salary (for a metropolitan city). = Rs 1, 50,000/-

Least of the three is Rs 90,000. So in this case Rs 90,000 can be claimed as HRA deduction for tax exemption.

What is Difference between HRA and City Compensatory allowance?

• City Compensatory allowance or CCA is the compensation provided to employees by companies to compensate for higher living costs in metro or Tier 1 cities.
• People who are working in Tier 1 cities becomes eligible for CCA only under certain circumstances. It depends on the employees pay scale and grade and not the basic wage.
• In case of HRA a person can claim up to Rs 1,00,000 as tax exemption whereas in case CCA the allowance is fully taxable.

Can both HRA and Deductions on Home Loan be claimed at the same time?

The answer to this question is yes. Both can be claimed as Interest paid on home loans has nothing to do with House Rent Allowance.

When the Landlord’s PAN CARD Does becomes essential?

• There are cases when the rent for house is more than 1 lakh annually then the Landlord Pan Card becomes compulsory. Else you are not eligible for claiming deduction. Landlord who do not have Pan Card should sign a self-declaration stating that he or she does not have Pan Card. It is as per the circular No 8/2013 dated 10 October 2013.
• Tenants who are paying rent to NRI Landlord must remember to deduct 30% TDS before making payment for rent.

What if HRA is not received from the Employer?

If suppose you are paying rent but you are getting the benefit of House Rent Allowance from your employer , still you can claim HRA deduction under section 80GG Provided following conditions should be fulfilled

1. An individual should be salaried
2. An individual should not receive HRA at any time during the year for which 80GG is being claimed
3. An individual or his spouse or minor child or HUF do not own any accommodation at a place where he or she is currently residing , or performing duties of office or employment or carry on business or profession.

If a person owns residential property other than the place mentioned above the benefit cannot be claimed as self occupied. The other property should be deemed to be let out to claim under section 80GG.

How to Claim Deduction Under section 80GG

The least of the following will be exempted from tax:

• Rs 5,000 per month;
• 25% of adjusted total income*;
• Actual rent should be less than 10% of adjusted total income*

Adjusted total income is calculated as below:

Total income minus long-term capital gain minus short-term capital gain under Section 111A minus income under Section 115A or 115D minus Deductions 80C to 80U (except deduction under Section 80GG).

How to claim HRA when living with parents?

When Rent is paid to parents there are certain questions which needs clarification like

• Is a rent agreement needed for claiming house rent allowance exemption if you pay rent to your parents?
• Is it sufficient to provide proof like rent receipts, direct credit of rent to parent’s bank account or TDS on rent payments?

• As per the provisions mentioned under Section 10(13A) of the Income Tax Act, 1961.HRA is not available in cases where the assesse has not actually incurred expenditure on payment of rent. Based on these facts it is assumed that parents are the legal and financial owners of the house property and the same is not owned by the assesse.
• As per the provisions of the Act, read with the Income-tax Rules, 1962, salaried individuals are required to furnish the specified particulars to the employer in Form 12BB in respect of claiming specified exemptions/deductions. For HRA tax exemption, an individual is required to provide to his employer, name, address and PAN (in cases where the aggregate annual rent paid exceeds ₹1 lakh) of the landlord.
• There is no specific list of documents prescribed, the employer may also ask for details like rent agreement, rent receipts, mode of payment, etc., before allowing this deduction. In the absence of these documents, this deduction may be disallowed at the tax withholding stage.

How to claim HRA in Income Tax Returns

• As we all know HRA is paid to salaried employees and it can be claimed when the employee is staying in a rented house. Now the problem is many of the tax payers are not aware how to claim the benefit of HRA while filing income tax returns.  So let us look at the procedure for claiming HRA Tax exemption.
• Unlike before, the tax department has now decided to sync ITR-1 with the Form 16. This will make easier for people to claim eligible benefits in their ITR. Form 16 is the official TDS certificate issued by an employer to its employees.
• Now tax filers can easily claim HRA by attesting Form 16 with ITR-1. However if you prefer the other way round, related documents can be submitted such as rent agreement or receipts in order to claim HRA. But both process can be troublesome for those people who do not have these documents handy.

CASE -1 Taxable HRA in ITR-1

The Taxable part of HRA is mentioned in the PART B of Form 16 under the head Gross Salary according to provisions in Section 17(1).

CASE-2- Tax Exempt HRA in ITR-1

• While filing Income Tax Returns you might observe that the HRA exempted amount is already pre filled. So you can verify it with you Form 16.  However if the details are not pre filled then manually you can copy the amount of tax exempt HRA from Part B and paste it under the Allowance exempt u/s 10 head in the ITR -1. Select the option 10(13) Allowance to meet expenditure incurred on house rent from the dropdown menu.
• Now if the necessary documents are not submitted to the employer then manually HRA amount should be calculated for claiming tax deductions. You have to deduct the tax exempt HRA amount from the Gross Salary. One must make sure that all details are correctly filled and all documents are kept ready in case in future if there is an enquiry from the Income Tax Department.