House Rent Allowance Formula & HRA Tax Exemption – A Complete Guide 2023

HRA or House Rent Allowance is a part of a salary compensation offered by organizations to their employees above their basic salary. This post will help you gain an insight on different aspects related to HRA.

HRA serves as an important constituent in the salary break-up of people working with any private or public sector organization. HRA allowance is offered on top of ones’ salary and as per one’s company policies as well as the salary of the individual. HRA is especially offered if the employee has a transferable job and pays house rent in the job location. The HRA amount in your salary is eligible for tax exemption as it helps you save money on tax. Let us now understand the meaning and importance of HRA.

What is House Rent Allowance or HRA?

HRA is a salary sub-component. The House Rent Allowance deductions are either partially or completely taxable under Income Tax Act (Section 10(13A).

The factors mentioned below are the ones on which the House Rent Allowance calculations depend:

• Employee’s salary
• Exact rent paid by employee
• HRA offered to employee by employer
• The location/residence of the employee
• The location where the company is situated

The income tax act of India has various sections which help different people to make their expenses on rent cheaper and convenient to pay. Employees, including public and private sector workers receive a salary which is composed of numerous constituents. To fix HRA, the employee and the employer goes through an agreement, which is mentioned in the confirmation letter offered by the company to the employee. Not just employees, HRA can be used to save tax by the self-employed as well as professionals.

HRA for Self Employed

As mentioned above, even the self-employed can claim HRA deductions and exemptions on house rent allowance income tax. Section 80 GG allows them the option to claim HRA benefits. In fact, the same section also permits employees who do not get HRA in their salary to claim rent benefits and exemptions.

HRA for Salaried Employees

Income Tax Act makes the salaried individuals eligible for HRA exemptions under section 10(13A). Since HRA is a critical element of a person’s salary, it should be claimed as per the rules set by the organization that you work for.

HRA Tax Exemption for the Salaried Individuals

The HRA tax deduction is lowest in the below mentioned cases:

• If the HRA is offered by the employer
• If the employee lives in a metro city such as Delhi, Mumbai, Calcutta, and Chennai, 50% of his/her salary is eligible for HRA tax exemption
• In case of other cities, the employee becomes eligible for HRA exemption of 40% of his/her salary
• Or it can be rent paid for accommodation by an employee each month subtracted by 10% of his/her salary

Here, by salary we mean basic salary along with commissions received as well as dearness allowance.

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Tax Benefits on Home Loan and Rented Residence

In a situation where the employee has rented his/her own house to someone and is living in a rented accommodation, the person can claim HRA exemptions on home loan (if any) as well as on the rent paid.

Documents Required to Claim the House Rent Allowance Related Tax Exemptions

An employee has to provide the below mentioned documents to claim tax exemptions on HRA:

• If rent amount paid within a budget year exceeds INR 1 Lakh, PAN card details of the employee and of property owner are required to claim exemption
• The employee should offer receipt of rent with details such as:

• • 1. Name of landlord
  • 2. Name of tenant
  • 3. PAN card details of landlord
  • 4. Address of the rented accommodation
  • 5. Duration of stay
  • 6. Revenue stamp
  • 7. Signature of the landlord on the revenue stamp
  • 8. Photocopy of rent agreement, if required

Eligibility Criteria to Claim Tax Deductions on HRA

Tax deductions on HRA can be claimed if you comply by the below mentioned criteria:

• The person claiming HRA deductions should be self-employed or salaried employee
• The person must be living in a rented accommodation
• The person might offer house rent receipt as proof or any other document required to claim HRA deductions

HRA Tax Exemptions on the Rent Paid Under Section 80 GG

Expenditure made towards house rent is exempted under section 80GG of income tax. However, this deduction can be claimed by employees if they have not claimed for any other exemptions of IT.  However, self-employed individuals or the employees who are not given HRA allowance by employers can claim the same exemption under section 80GG.

HRA calculator

The HRA calculator is a free to use tool available online. This calculator helps you in estimating the HRA you receive and the tax deductions you can claim for. It is not necessary that every employer would offer you HRA. This is because HRA is not the right of employees, rather it is at the discretion of the employer to offer HRA or not. If your employer is offering you free accommodation in the job location, they may not allow HRA separately. In that case, you cannot claim HRA deductions.

How to calculate HRA?

Here are the factors based on which HRA is calculated:

• Salary of a person
• HRA element of your salary
• The amount of rent you pay
• The location where you live on rent

HRA deduction rules and tax exemptions 

Here are some rules that are applicable for HRA claims:

• You cannot claim more than 50% of your basic salary as HRA
• You cannot claim the full HRA amount for exemption. HRA is based on the one of the least amounts mentioned below:
• The exact rent that you pay minus 10% of your basic salary received
• The exact HRA offered by your employer
• If you live in a metro city, the HRA would be 50% of your basic salary

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HRA benefits can be claimed if you have a home loan

• People living in their own house can also claim HRA by paying rent to parents. But you have to provide enough proofs
• If the rent you pay per year is above INR 1,00,000, you have to show PAN details of your landlord as a mandatory requirement while filling the HRA claim form
• If the house you have rented belongs to an NRI, you may exempt 30% tax from your rent while declaring the same

Below are some rules based on which HRA tax exemption is done:

• Precise HRA amount received
• The actual rent amount paid minus 10% of salary
• 50% of the basic salary if you are living in a metro city
• 40% of the basic salary if you are living in a non-metro city

You can claim the least amount of the above for HRA tax exemption.

How to Claim HRA when living with your parents?

HRA benefits can be availed even if the tax claimant is living in his/her parental house. Let’s find out how? Suppose, you live with your parents in their house and your employer offers you HRA benefit as part of your salary. Now, how would you get HRA benefit? In this case, you have the option of paying rent to your parents to claim your maximum house rent allowance. You just need to fill out an agreement of rent with your parents and transfer rent every month to them. This way you can enjoy tax exemption while living in your parental house.

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