House Rent Allowance (HRA) is an integral component of a salaried individual’s income. Understanding how to calculate HRA can lead to significant tax savings, making it essential for taxpayers to grasp the nuances of HRA deductions and their implications.

What is HRA?

House Rent Allowance, commonly known as HRA, is a part of the salary provided by employers to employees to cover their rental expenses. This allowance is particularly beneficial for employees who reside in rented accommodations, as it offers tax benefits under the Income Tax Act. The primary objective of HRA is to make housing affordable for employees, especially in metropolitan and urban areas where rent costs can be substantial.

Conditions to Claim Deductions in HRA

To claim HRA deductions under Section 10(13A) of the Income Tax Act, the following conditions must be met:

1. Salaried Employee: The individual must be a salaried employee.
2. HRA as Salary Component: HRA should be included in the salary structure.
3. Rented Accommodation: The employee must reside in a rented house.
4. Rent Payment: Rent must be paid, and receipts should be in the employee’s name.
5. Deduction: Deductions can be claimed under either Section 10(13A) or Section 80GG, but not both.
6. Maximum HRA Deduction: Under Section 10(13A), the maximum HRA deduction allowed is the actual HRA component received from your employer.

It’s important to note that HRA can only be claimed for the period during which the employee resides in the rented accommodation.

HRA Calculation with Example

HRA exemption is calculated under Rule 2A of the Income Tax Rules. The least of the specified amounts is exempt from salary under Section 10(13A) and is not considered part of taxable income.

The calculation is based on the following three criteria:

1. Actual HRA received from the employer
2. For those living in metro cities: 50% of (Basic salary + Dearness allowance) and for those living in non-metro cities: 40% of (Basic salary + Dearness allowance + Commission)
3. Actual rent paid minus 10% of (Basic salary + Dearness allowance + Commission)

Important Note:

• If Commission is paid to an employee based on a fixed percentage of turnover achieved by that employee as a part of the contract of employment, such commission will be included in the ‘salary’ for calculation of HRA exemption.
• Bonus will not be included in the salary for the calculation of HRA.

Differing Views on Including Commission:

It is important to note that while some interpretations and court cases support the inclusion of commission in the salary for HRA calculation, this view is not universally accepted. Many reputed websites and tax experts do not cite commission as part of the salary for HRA calculations. However, there are two High Court cases that do permit the inclusion of commission in the salary:

1. Commissioner of Income-tax v. Gestetner Duplicators Pvt. Ltd. [1977] 110 ITR 46 (Cal)
2. COMMISSIONER OF INCOME-TAX, WEST BENGAL I, CALCUTTA VERSUS H.V. YAZDI [1978] 114 ITR 14

These cases serve as legal precedents for including commission under certain conditions.

Employees must provide the landlord’s PAN if the annual rent exceeds ₹1,00,000 when filing income tax returns. Below is an example to illustrate the HRA component that would be exempt from income tax:

Mr. Nitin Kumar, employed in Bangalore (Classified as Non-Metro City as per HRA guidelines), has taken up an accommodation on rent for which he pays a monthly rent of ₹ 50,000/-. He receives a Basic Monthly Salary of ₹ 50,000/-, HRA of ₹ 20,000andDearness Allowance (DA) of ₹ 10,000/- as part of his salary structure. Additionally, he earned a commission of Rs. 90,000/- that year based on his incentive for achieving his financial targets.

The following is the calculation of the HRA exemption under the old income tax scheme for salaried employees:

Automated HRA Calculator

Therefore, ₹2,40,000 would be exempt from salary under Section 10(13A). Even if an employee doesn’t receive HRA or has no salary income, they can still claim rental expense benefits under Section 80GG of the Income Tax Act, 1961.

Important tips to consider

• For HRA exemption claims exceeding ₹1 lakh in annual rent, the landlord’s PAN number is required. If the landlord doesn’t have a PAN, a signed declaration is necessary. Without either, HRA tax deductions cannot be claimed.
• HRA deductions vary by location: 50% in metro cities (Delhi, Mumbai, Kolkata, Chennai) and 40% elsewhere.
• HRA is meant for rented accommodations; hence, it cannot be claimed for self-owned homes.
• If living with parents and paying rent to them, HRA can be claimed, but parents must declare this income.
• Rent paid to a spouse is not eligible for HRA deductions.

HRA Rules for Self-Employed Individuals

While HRA is typically associated with salaried employees, self-employed individuals can also claim similar benefits under Section 80GG of the Income Tax Act. However, the conditions are stricter, and the deduction is capped at ₹5,000 per month or 25% of total income, whichever is less.

HRA Exemption

There are several scenarios where HRA exemptions become critical:

• HRA Exemption When Employer Refuses to Provide Deduction Benefits: If your employer does not provide HRA, you can still claim deductions under Section 80GG, but with more stringent conditions.
• HRA Exemption When More Than One Family Member Pays Rent: In cases where more than one family member contributes to rent, only one member can claim HRA. The rent agreement and payment receipts should reflect this arrangement.

Documents Required to Claim HRA Exemption

To successfully claim HRA exemptions, ensure you have the following documents:

• If your annual rent exceeds ₹1 lakh, you’ll need to submit the landlord’s PAN details and a copy of their PAN card.
• Rent receipts should include the date, landlord’s name, tenant’s name, landlord’s PAN details, rental address, stay duration, and a revenue stamp with the landlord’s signature. You’ll need at least four receipts for the year, as each receipt covers three months. 
• A photocopy of the rent agreement may also be required.

Conclusion

Understanding HRA and how to calculate it can provide significant financial benefits, especially in terms of tax savings. By meeting the eligibility criteria, maintaining proper documentation, and staying informed about the rules, you can make the most out of your HRA component. Whether you are salaried or self-employed, leveraging HRA exemptions can play a crucial role in your financial planning.

Special Thanks:

We extend our special thanks to CA Mukul Sringeri from Finominal Advisors for his valuable contributions to this blog. For more details, you can contact him at +91 99453 97780 or mukul.sringeri@finominals.com.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Agarwal Estates is not liable for any actions taken based on the information provided in this article. Consult with a tax advisor to ensure compliance and stay updated with tax laws.