House rent allowance (HRA) is an important part of the salary structure of all salaried employees. The importance of HRA is also greater because through it tax exemption can be obtained. But, to save tax through HRA, you have to understand how it is calculated, who gets its benefit and how tax exemption can be availed through it.
What is House Rent Allowance?
You can understand HRA as an allowance which employers or companies give to their employees to pay house rent. When the employee receives this amount, it is taxable i.e. it is taxed. But, there is exemption on HRA under Section 10 (13A) of the Income Tax Act. To avail this benefit, it is necessary that the employee lives in a rented house. If you are self-employed, you will not get tax exemption on HRA.
How is HRA calculated?
There is also a limit on how much tax you can save on HRA. It depends on three things. First, how much is left after deducting 10 percent of the annual salary from the annual rent you pay? Second, what part of your salary is HRA? Third, if you live in a metro city i.e. cities like Delhi, Mumbai or Kolkata, then HRA will be 50 percent of the basic salary, while for other cities it will be 40 percent.
Whichever amount is the lowest among these three, you will get the benefit of tax exemption. For example, Ramesh works in Delhi and lives in a rented house. His basic salary is Rs 23 thousand. He gets HRA of Rs 15,000 per month and his monthly rent is Rs 12,000.
On the basis of this allowance, Ramesh’s tax exempt amount will be calculated in this way.
Ramesh pays a rent of Rs 12 thousand and his basic salary of Rs 23 thousand, 10% is Rs 2,300. That means, after subtracting 2300 from 12 thousand, the amount will be Rs 9,700. At the same time, the HRA received from the employer/company is Rs 15,000. Basic salary i.e. 50 percent of Rs 23 thousand is Rs 11,500. Among these three, the lowest amount is the one which is arrived at by deducting 10% of the basic salary from the rent i.e. Rs 9,700. This means that Ramesh will get the benefit of tax exemption on Rs 9,700.
How to get tax benefit on HRA?
If you want to avail tax exemption on HRA, then definitely obtain the rent receipt from your landlord. Even if you have a rent agreement with the landlord, you will still get the discount. It is also worth noting that if you pay rent of more than Rs 15,000 per month or Rs 1 lakh per year, you will need PAN of the landlord, only then you will get tax exemption.
Keep these things in mind also:
- Even if you pay rent to a member of your family, you can still get tax exemption on HRA. But, in this situation, your family member will have to give information about the rent received from you while filing the income tax return.
- If you have your own house in the city where you work, but you live in a rented house, you can still avail tax exemption on HRA.
- You can avail tax exemption on HRA along with other tax concessions. Such as tax exemption on interest paid on home loan (section 24b) and exemption on repayment of housing loan under section 80C.
