House Rent Allowance – How to claim and maximize deduction?

Section 10(13A) of the Income Tax Act, 1961, provides exemption from tax on house rent allowance (HRA) received for salaried employees residing in a rented accommodation.

Self-employed individuals and those salaried employees who do not have HRA in their salary structure cannot claim deduction of HRA.  Still they can claim benefits on the house rent expenses incurred under a separate section (i.e. 80GG), which resembles section 10(13A), but is subject to certain conditions.

HRA exemption can be claimed for the least of the following amounts:

  • Actual amount of HRA received from the employer
  • Actual amount of rent paid for the house in excess of 10% of the basic pay
  • 50% of basic pay for metro cities and 40% for non-metro cities. (metro cities include Delhi, Mumbai, Chennai and Kolkata)

For claiming the exemption, the employee must stay in a rented house during the period for which the exemption is being claimed, and must have actually incurred the expenditure of payment of rent.

‘Salary’ for the purpose of computing the HRA exemption, means:

  • Basic salary
  • Dearness allowance, if the terms of employment so provide
  • Commission based on fixed percentage of turnover achieved by the employee

Points to consider for claiming tax exemption on HRA:

  • An employee is required to submit a rent receipt or rent agreement to the employer as proof of the incurring of such expense. The employer is not required to verify the receipt for granting the exemption to the employee.
  • No rent receipt is to be obtained if the rent is less than Rs 3000 per month. In case the amount of rent claimed exceeds Rs 100000 per year, then the Permanent Account Number (PAN) of the landlord is to be disclosed. If the landlord does not have a PAN, the employee is to submit a declaration to this effect along with name and address of the landlord
  • HRA exemption can be claimed by an employee if he owns a house but stays in a rented accommodation (in cases where the employee owns a house in a city outside of his job location)
  • In cases where an employee has taken a housing loan from a bank to purchase the house, he can avail the deduction of interest under Section 24 of the Income Tax Act and the repayment of principal towards the loan under Section 80C, even when claiming HRA exemption for staying in a rented accommodation
  • The rent receipt should have a one rupee revenue stamp with the signature of the receiver of rent, and details such as rented residence address, amount of rent paid, name of the person paying the rent etc

Example for calculating exemption/deduction of HRA.

A has received the following as salary in the previous year.

Basic Salary– Rs 60,000 (5,000*12)

Dearness Allowance (DA)– RS 12,000 (1,000*12)

HRA– RS 24,000 (2,000*12)

Rent paid: RS 24,000 (2,000*12).

The minimum of the following will be exempt.

Actual HRA– Rs 24,000

Rent paid in excess of 10% of salary (24,000-7,200) – Rs 16,800

40% of salary (assuming the rented house is in non-metro city) – Rs 28,800.

Therefore, Rs 16,800 shall be exempt from tax, and the balance of Rs 7,200 will be included in gross salary.

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