HRA is provided to employees to offset/balance the cost of living depending on the city/region they live in. The cost of living in a particular city/region can be higher or lower than other cities/regions of the country based on multiple factors, such as taxes, food expenses, cost of groceries and house rents.
Employees, who live in rented houses, can claim HRA to lower their taxable income. HRA can be partially or completely exempt from taxes. The HRA is for expenses related to rented accommodation.
For employees, who don’t live in rented accommodations, this allowance is fully taxable. If you live in an owned property you may consider getting some relief on the interest and principal paid towards home loan installments.
The calculation of HRA depends on the following four factors:
- The employee’s salary
- The HRA component of the salary
- The rent paid by the employee
- The location (city) of the rented residence
Rules of Exemption
The tax exemption on HRA is equal to the lowest of the following four amounts:
- Actual HRA received
- Actual rent paid reduced by 10% of salary
- 50% of basic salary, if the employee is living in a metro city
- 40% of basic salary, if the employee is living in a non-metro city
Generally, metro cities have higher house rents than non-metro cities. Therefore, the exemption percentage is higher for metro cities.
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As the lowest of the above four amounts will be exempt from tax, the employee can ask his/her employer to restructure the salary to get maximum tax benefit.
Example: Calculation of HRA
Sam lives in Bengaluru and earns a basic salary of INR 50,000 pm. The HRA component of his salary is INR 20,000 but the actual rent paid by him is INR 10,000. How much exemption will he get?
To answer this question, look at the factors that impact HRA calculation to get the lowest amount:
- Actual HRA received is (INR 20,000 x 12) = INR 2,40,000
- Actual rent paid (INR 10,000 x 12) – 10% of salary [(INR 50,000 x 12) x 10%] = INR 60,000
- 40% of basic salary (as Bengaluru is a non-metro city) = [(INR 50,000 x 12) x 40%] = INR 2,40,000
INR 60,000 is the lowest amount among the above obtained figures. Therefore, Sam will get INR 60,000 exemption on HRA.
FAQs on HRA
1. Can an employee get tax benefits on HRA along with tax benefits on home loan?
Yes. Employees can claim both tax exemptions together. If an employee is a houseowner, who’s paying home loan but living in a rented accommodation, then he/she can get tax benefits for both cases.
Here are the various scenarios possible wherein an employee can claim HRA:
- Employee’s staying in own house: In this case, he/she cannot claim HRA exemption. The entire HRA component will be taxable.
- Employee owns a house in city A but stays on rent in City B: In such a case, he/she can claim HRA exemption.
- Employee’s own house is under construction and is currently staying in the same city on rent: In this case, he/she can claim HRA exemption.
- The employee’s house is in city A and is staying on rent in the same city: The employee can claim HRA exemption provided that he/she can prove that the own house is far away from the workplace. In this case, he/she can claim tax benefits on both the home loan as well as the HRA component. Also, if the employee has rented out his own house, he/she needs declare rental income in his/her Income Tax returns. However, if the own house is vacant, then the employee should declare notional rent.
2. To claim HRA, whom does an employee pay rent to?
HRA benefits can be claimed if an employee pays rent to his/her landlord (owner of the property) where the employee lives. However, the owner can be anyone including the employee’s parents, relatives or friends.
There should be a legally valid rental agreement between the houseowner and the employee and there should be proof that the employee is paying the required rent each month to the landlord.
3. Is the landlord’s PAN mandatory to claim HRA?
Yes, if the employee’s rent is higher than INR 1 lakh p.a., then it is mandatory to mention the PAN number of the landlord in the rental agreement to claim tax exemption on HRA.
4. If an employer does not provide HRA in the salary, can the employee still claim relevant tax deduction?
Yes, Section 80GG of the Income Tax Act allows tax deduction to the employee living on rent even if he/she does not get HRA from his employer.
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