House Rent Allowance or HRA is one of the most widely provided allowances for employees by their employers. It is applicable when the employees stay in rented accommodations. Unlike some of the other allowances, the HRA is predominantly for salaried individuals’ HRA Deduction.
Housing is one of the most basic needs and rent paid quite easily eats up the salary of an individual. To help salaried individuals with the situation, the Income Tax Act brought in HRA. The following are three primary reasons why you should apply for an HRA deduction.
-
Reduce your Taxable Income
Section 10(13A) outlines the tax exemptions that you are likely to benefit from HRA deductions. If you are a salaried individual and your employer offers HRA, you can reduce your net taxable income by a considerable margin.
According to Section 10(13A), the lowest of the following three values is considered as an HRA deduction for a financial year.
- The actual HRA that an employee receives for a financial year
- 50% of the basic salary of an individual (including dearness allowance) if they live in a metropolitan city. And 40% of basic salary if they live in a non-metropolitan city.
- The actual rent that an individual pays minus 10% of the basic salary
Here is a simple example to illustrate the same. Let’s consider your basic salary to be INR 50,000 per month and you receive an HRA of INR 18,000 per month and the actual rent that you pay is INR 20,000.
| HRA Received | 18,000 |
| 50% of Basic (Metros) | 50% of 50,000 = 25,000 |
| Rent Paid – 10% of Basic | 20,000 – 10% of 50,000 = 15,000 |
| HRA exemption (Lowest of three) | INR 15,000 per month or INR 1,80,000 for the year |
For the above example, the net taxable income of an individual will come down by INR 1,80,000.
-
Reduce your Taxes
A straightforward benefit of the above example is that you are liable to pay lower taxes. Adding to the basic of INR 50,000 and HRA of INR 18,000, a special allowance of INR 30,000, the total income of an individual would be INR 98,000 per month or INR 11,76,000 per annum.
For the above example, once HRA is claimed, the net taxable income reduces from INR 11,76,000 to INR 9,96,000. For the sake of simplicity, no other deductions are considered for the example. Whether you opt for the new tax regime or the old tax regime, the above would bring your taxable income to a slab lower. From 30% to 20% tax slab in the case of the older tax regime and from 20% to 15% for the new tax regime.
-
Claim along with Home Loan
There is a possibility that you might be staying at a rented place while you pay EMI for property elsewhere. In such instances, you are eligible to claim benefits for both. You can reduce your net taxable income via HRA and claim tax deductions for the interest paid on the home loan.
However, if the amount for both the claims is higher and there are no proper justifications for the same, it might just get the attention of the authorities. Failure to furnish the necessary documents for both the claims might also lead to the rejection of the claims.
HRA deduction can be a great way to reduce your tax liability for a financial year. However, to ensure a smooth process and no rejection, you must ensure the following.
- The HRA amount is calculated for rent paid every month. If you have not paid rent for a couple of months during a financial year, you cannot claim those amounts.
- The city that you live in, and the basic salary are two prominent factors on which the HRA depends. Thus, a change in either of the factors would impact the HRA.
- If due to some reason you were unable to submit any HRA-related document during the financial year, you need not worry. You can do so while filing your returns as well. And if you have paid any additional taxes, the same would be refunded.
- Though HRA deduction applies to self-employed individuals, it is under a different section. You can claim your deductions under Section 80GG.
- You would need to fill out Form 10-BA to declare your eligibility to claim HRA under section 80GG.
Salaried individuals paying rent to their landlord, must furnish their PAN details if the rent exceeds INR 1 lakh for a financial year. If their landlord does not have a PAN card, you can furnish Form 60 duly filled by the landlord.
HRA Deduction: To know more, click here.
Conclusion
HRA is one of the simplest tools that can help you reduce your net taxable income and in turn, your taxes. However, failing to submit the required documents or providing proper justification can also lead to the rejection of the claims.
