[HRA Calculation] How to calculate HRA to save tax

HRA calculations confound the best of us. If you are responsible for running payroll in your organization, read on. In this blog, I will demystify this often misunderstood salary component. As an employee, you may also want to understand how you can claim tax benefits from HRA. The House Rent Allowance is given to an employee when he or she lives in rented residential premises, and is only provided when the employee stays at a residence that he or she does not own. I will cover the following today:

• Eligibility rules to claim deductions in Income Tax HRA Section
• How much can one benefit from HRA?
• How to calculate HRA exemption?
• Income Tax savings under Section 80G when there is no HRA
• House Rent Allowance Income Tax benefits
• HRA Income Tax deduction steps to take as an employer
• House Rent Allowance Income Tax Exemption Rules & Tax Deductions
• HRA Rules for Self-employed individuals
• HRA Exemption
• Documents Required to Claim the HRA Exemption Claim Rules for HRA
• HRA Tax Exemptions on the Rent Paid Under the Section 80 GG
• Unraveling House Rent Allowance Tax Exemption
• FAQ

Eligibility rules to claim deductions in Income Tax HRA section

As per Section 10(13A) of the Income Tax Act, an individual can claim for deductions in taxes on HRA if they fulfil the eligibility conditions mentioned below:

• The individual must be salaried.
• The HRA must be a part of the salary component.
• The individual must live in rented accommodation.
• The individual must pay the home rent. This means that the rental receipt must be produced in the name of the individual.

How much can one benefit from HRA?

For salaried employees staying in rented accommodation, HRA is one of the more effective tax saving tools. The determination of HRA tax exemption is slightly complex and depends on upon 3 factors:

• HRA amount provided by the employer as a salary component.
• Actual rent paid by the employee.
• Basic pay of the employee.

The amount of HRA eligible for tax exemption would be calculated as least of the below three values:

• Actual HRA received – this caps the limit of what can be tax-exempted.
• Rent paid – 10% of your salary (typically means basic salary) – basically exemption starts only over 10% of your basic salary – that much has to be paid from your pocket without any tax exemption.

50% of your basic salary if working in metros, and 40% if working in non-metros – which means that after first 10% of your basic salary, you can get exemption up to another 50% / 40% of your basic salary as tax exemption, provided your House rent allowance is that high (cap applied by first condition – actual HRA received).

Example

Let’s take an example to understand this better: X is a manager working in Mumbai (a metro city). He earns a basic salary of Rs. 50,000 and gets HRA of Rs. 22,500. He stays in Andheri and pays a monthly rent of Rs. 22,000.

 To determine X’s HRA exemption we will need to find out the least of the three values outlined as per above:

1. HRA provided = 2,70,000 (22,500*12)
2. Rent paid – 10% of salary = 2,04,000 ((22,000-5,000)*12)
3. 50% of basic salary = 3,00,000 (25,000*12)

Since option 2 (Rs. 2,04,000) is the minimum of the above three values, that will be the HRA exemption that X can avail. In other words, X pays additional rent Rs. 2,04,000 after first 10% of basic salary, which is within limit of his actual HRA, and hence he can get deduction of Rs. 2,04,000 from taxable income. If for instance his actual HRA was Rs. 1,80,000, he could have claimed maximum Rs 1,80,000 as deduction from taxable income.

How to calculate HRA exemption?

An Illustration

For instance, if X earns an annual capital of Rs. 4 lakhs, and pays the annual rent of Rs. 1.5 lakhs, he will be provided a tax exemption which will be the least of: 

	Tax Exemption
1.	Rs. 60, 000 (@Rs 5000 Per Month, according to the HRA exemption 2016-17 rules, earlier the limit was Rs 2, 000)
2.	Rent paid i.e. 1.5 Lakhs – 10% of the total annual income, i.e. Rs 40, 000= Rs 1, 10, 000
3.	25% of the total income= Rs 1 Lakh

 As the least of the three is Rs. 40, 000, this would be the HRA tax exemption provided to X, and the 1st condition will prevail.

Date for Filing the ITR and Claiming the Income Tax HRA Exemption

For all those who are salaried, and who want to claim the HRA tax exemptions, among others, the last date for filing and submitting the ITR (Income Tax Returns) is July 31st of a given financial year. For the self-employed, that last date is;

• July 31, when they do not require an Audit of their income.
• September 30, when they require the audit to be done on the income

Important tips to consider for House Rent Allowance

• If an individual pays annual rentals of greater than ₹1 lakh, the PAN number of the landlord is needed for claim exemptions in HRA. If the owner or landlord doesn’t have the PAN, then they must produce a duly signed declaration. However, if you cannot produce either of these, the individual will not be able to claim deductions in taxes of HRA.
• The HRA differs based on the region of the country. If an individual is living in any of the metro cities (like Delhi, Mumbai, Kolkata or Chennai), they can claim tax deductions of up to 50% of the HRA. And if the individual lives in other regions of the country, they can claim tax deductions up to 40% of the House Rent Allowance.
• HRA is provided to fulfil the rental accommodation expenses, and hence, the individual cannot claim this allowance if they are living in their self-owned residence.
• If the individual is staying with parents and produces rental receipts in their parent’s name, they can claim an exemption in HRA. However, the parents are required to show the rental income while filing their income tax returns.
• The individual is not allowed to give rent to their spouse, and then claim deductions in HRA.

Income Tax savings under Section 80G when there is no HRA

If the individual is staying in rental accommodation but doesn’t receive an HRA, or if the individual is self-employed and stays in rented accommodation, they can claim deductions in taxes on their rental expense under Section 80G on the Income Tax Act.

The lowest amount from the options given below can be claimed for deductions under Section 80G:

• Actual rent payment – 10% of total income; or
• ₹5000 every month or ₹60,000 every year; or
• 25% of the gross total earnings.

House Rent Allowance Tax Benefits

As per the House Rent Allowance Calculation, tax benefits can be claimed on the lowest values from the options given below:

• The actual rent payment minus 10% of basic salary; or
• The entire HRA allowance granted by an employer; or
• 50% of basic salary if you are located in any of the four metro cities, 40% if you are staying anywhere else in India

With these simple steps, you can calculate exemption on your HRA and the tax benefits that you can receive on your monthly rental expense.

HRA Tax deduction steps to take as an employer

As an employer, there are various steps you should take to ensure a smooth running at the workplace. To make sure that there are no confusions or inconveniences. Here are a few steps you should take:

1. Ask the employees to declare their rent at the beginning of their employment period.
2. Ask for submission proof of the tax deduction when the final calculations happen (around December).
3. Calculate the tax deductions and generate payslip online.

Similarly, tax deductions can be calculated through online payslip software. This will not only save a lot of time but also reduce the amount of stress or confusion that will occur as an employer.

House Rent Allowance Income Tax Exemption Rules and Deductions

The following rules are applicable for HRA claims:

• HRA can’t be more than 50% of your basic salary
• The full amount cannot be claimed as the exemption is based on the least of the following:
• Actual rent paid (-) 10% of the basic salary.
  1. Actual HRA received from the employer
  2. 50% of the basic salary if the tax-claimant lives in a metro city
  3. You can claim for HRA benefits for home loan
• In case you are living in your own house, you can pay rent to your parents and provide sufficient proof in order to claim HRA benefits. Due to the same scenario, you can’t pay rent to your spouse and claim HRA.
• In case of rent exceeding Rs. 1,00,000, the PAN details of the landlord is mandatory to provide along with the HRA claim form.
• If the landlord is an NRI, you can deduct 30% tax from the rent and declare the same.

This means the HRA tax exemption is done based on the following rules:

• Exact HRA received
• Exact rent paid reduced by 10% of salary
• 50% of the basic salary if the tax-claimant is residing in a metro city
• 40% of the basic salary if the tax-claimant is residing in a non-metro city

Since the least of the above is eligible for HRA tax exemption, you can request the employer to rearrange your salary to avail maximum tax benefit.

HRA calculation can be done annually in case the deciding factors remain constant. In case any factor changes during the respective financial year, the calculation can be done on a monthly basis.

HRA Rules for Self-Employed Individuals

The self-employed can likewise guarantee for derivations and HRA charge exclusions, towards the House Rent Allowance (HRA). They can guarantee the advantages under the Section 80 GG. This Section can likewise be utilized to guarantee the HRA charge exceptions by the salaried representatives when they don’t get any House Rent Allowance.

In case you are a self-employed individual, then you, too, can claim House rent allowance deduction and tax exemptions under the Section 80GG of the Income Tax Act. This section also applies to those of you who are salaried individuals when you do not receive HRA. 

House Rent Allowance rules under Section 80 GG are as follows:

• The house rent allowance or HRA exemption is available only to the HUF and the individuals under the Act.
• Self-employed individuals and salaried people can claim rent deductions only if they do not receive tax exemption under the provisions of Section 10-13A.
• The employee, HUF (Hindu Undivided Family) in which the employee is one of the members, the spouse or the minor child shall not enjoy ownership of any accommodation, where the concerned person is residing or working.
• Those who wish to receive HRA exemption under Section 80 GG should not claim tax benefits related to any other self-occupied property they own elsewhere.
• Under Section 80 GG, those who want to claim HRA deduction should furnish a self-declaration, using the form 10-BA. The individual will be required to show that he/she duly satisfies all the other above mentioned conditions, in this form.

HRA Exemption

At the point when the Rent Amount Exceeds Rs 1 Lakh:

If the rent paid towards house rent is more than Rs 1 Lakh, the individual can guarantee HRA charge exclusions towards it. The person should outfit the PAN subtleties of the land owner, alongside the rent receipts.

HRA Exemption When Employer Refuses to Provide Deduction Benefits

Regardless of whether your manager won’t give HRA related tax reductions, you can guarantee the equivalent at the hour of documenting personal assessment forms. According to the HRA rules, you will get the absolved sum as the discount of the overabundance TDS.

Salaried representatives who live in a rental convenience yet don’t get HRA from their manager can’t guarantee HRA exclusion under area 10(13A). Be that as it may, there is a choice offered under area 80GG of the Income Tax Act. Under this part, independently employed individuals and salaried workers who aren’t paid HRA can guarantee the least of the accompanying as a derivation.

• Absolute rent paid less 10% of fundamental compensation.
• Rs 60,000 every year (Rs 5,000 every month).
• 25% of the changed gross complete pay.

HRA Exemption When More Than 1 Family Member Pays Rent

In the event that both a couple are procuring, and the two of them are paying the house rent, the two of them can guarantee the duty refund identified with the HRA, in the event that the two of them can outfit the different rent installment receipts. In any case, for a solitary rent paid, any of them can just guarantee the assessment exclusion.

Tax reductions on Both Home Loan and Rented Residence

In the event that the home of the representative is rented to another person, and the individual is living in a rented space, the individual in question can guarantee the advantages of HRA charge exceptions on both home credit and the rent paid. For this situation, the worker should mean their pay picked up through the property (for which he/she took the home advance), and pay the due assessment for it.

Note: in the event that the rented and the possessed property in a similar city, the derivations on both are not accessible for HRA charge exclusions. The worker should also demonstrate that their property is situated far away from the employment area, and can’t be utilized for the private purposes, to profit the tax break as HRA exclusion.

Documents Required to Claim the HRA Exemption Claim Rules for HRA

The employee will have to provide the following documents, in case he or she wishes to claim or the tax exemptions related to the House Rent Allowances:

1. If the rent paid during given financial year is greater than Rs 1 Lakh, the employee will have to provide the PAN card details and copy of the landlord/property owner in order to claim HRA tax exemption.
2. The receipts of rents paid by the employee. The details of the receipt include:
3. Date name of the landlord
4. Name of the tenant
5. PAN card details of the landlord
6. Address of the rented accommodation
7. Duration of stay
8. A revenue stamp
9. Signature of the landlord, on the revenue stamp
10. The same receipt can be used for a period of 3 months. Hence, for a year, you need at-least last 4 receipts.
11. The photocopy/Xerox of the rent-agreement, when required

• The employee can also pay the house rent to his or her father, and claim the tax exemptions related to the House Rent Allowance (HRA).

Conditions that Need to be Fulfilled for Claiming Tax Exemptions Related to House Rent Allowance

• The HRA exclusion under Section 80, or other segment, is possibly given to a representative when or she really pays the rent to the property manager. There is no exclusion for the time spans when the rent isn’t paid.
• When there is an adjustment in employment area (for example move from non-metro to the metro urban communities or the other way around), or an adjustment in the compensation, the HRA charge are determined on the month to month premise. Henceforth the derivations or the House Rent Allowance charge exceptions additionally shift for the times of progress independently.
• Aside from a dad, if the rent is paid to some other relative, House Rent Allowance and the duty special cases identified with it are given to the representative. To guarantee the derivations, it is prudent to pay the rents on a standard month to month premise and through the bank moves as it were. This will help the IT division to effectively derive the use.

HRA Tax Exemptions on the Rent paid under the Section 80 GG

The Section 80 GG of the Income Tax Act accommodates the expense exclusions, for the uses that are made towards the House Rent. In any case, the House Rent Allowance exclusions under this specific segment are accessible to the worker just when the individual in question has not guaranteed the allowance under some other segment of the Income Tax (IT) Act. Independently employed experts and the workers who don’t get the House Rent Allowance can guarantee the HRA charge exceptions for the uses that they make towards paying the house lease under this Section of 80GG.

Other Conditions Related to the Section 80 GG

• The house rent exceptions are simply accessible to the HUF and the people.
• Both independently employed individuals and salaried representatives can guarantee rent-related allowances on the off chance that they don’t get any duty exclusions under the Section 10-13A
• The HUF of which the worker is also a part, the minor youngster, or the companion abhors the responsibility for convenience, where the representative/self-worker individual is working.
• The individuals who also look for charge exceptions under the Section 80 GG ought not guarantee any tax breaks identified with a self-involved property, which they own somewhere else.
• The individuals who also look for derivations under the Section 80 GG should have the option to outfit the self-presentation, by utilizing the structure 10-BA. In the structure, the individual should show that the person fulfills all the conditions.

Actual Taxation Exemption for Expenditure Made Towards Rent, Under the Section 80 GG

Under the Section 80 GG, the independently employed or the salaried individual can guarantee a HRA charge exception. Or the rent paid by the person in question, in abundance of 10% of his/her pay or pay separately.

1. The upper roof is 25%, which implies that rent paid in the middle of 10% and 25% of the compensation/pay. Which is just accessible for derivation/HRA exclusion; or
2. Rs. 5000; or
3. 25% of the absolute changed complete pay, where changed all out pay implies

Net Total Annual Income – the “long haul” capital increases – the “present moment” capital additions. Derivations guaranteed under Section 80 (from the Section 80 C to the Section 80 U, aside from the segment 80 GG itself).

Whichever of 1, 2 or 3 is less, will be exempted from taxation, by the income tax department.

Unraveling House Rent Allowance Tax Exemption

House Rent Allowance is an additional advantage that is offered by a business to its representatives. In the event that you are remaining in a rented house and getting House Rent Allowance as a piece of your compensation, you can guarantee for full/incomplete House Rent allowance exception according to the Section 10 of IT Act. Then again, House Rent Allowance is available on the off chance that you can’t give a proof of rented convenience.

House Rent Allowance benefits are just accessible for a salaried individual, where an independently employed individual can’t guarantee House Rent Allowance benefits. Also, House Rent Allowance charge exception is just relevant in the event that the petitioner is living in a rented house.

If there should be an occurrence of rent paid that surpasses Rs. 1 lakh in a monetary year, the representative requirements to outfit the PAN card subtleties of the landowner alongside the House Rent Allowance guarantee.

 

FAQ

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.