House Rent Allowance and Tax Saving
A salary structure generally consists of House Rent Allowance along with Basic Salary. However, HRA can provide you with some tax exemption, unlike basic salary.
Who can claim HRA exemption?
Salaried individuals who are staying in a rented apartment can claim the House Rent Allowance (HRA) to lower his / her taxes. The allowance is for expenses related to rented accommodation permissible under Section 10(13A) of the Income Tax Act, in accordance with Rule 2A of the Income Tax Rules.
Hence if you are not living in rented accommodation or you own the property in which you live or if you are not incurring the rental expenses yourself, this allowance is fully taxable.
How to compute HRA exemption?
Computation of HRA is subjective to the place of residence. For metro cities like Mumbai, Kolkata, Delhi or Chennai, the tax exemption is 50 % of the salary, while for other cities it is 40 %.
The amount of deduction is computed as follows:
a. Actual HRA received, OR
b. 50% of [basic salary + Dearness Allowance + commission as fixed % on turnover] for those living in metro cities (40% for non-metros); OR
c. Actual rent paid less 10% of (basic salary + DA + commission as fixed % on turnover)
whichever is less
For eg: Mr. ABC earns a basic salary of Rs 25,000 per month and lives in a rented accommodation in Mumbai for Rs 10,000 per month. His actual HRA is Rs 10,000. Then, his HRA exemption will be the least of the following 3:
- Actual HRA received – Rs 10,000
- 50 % (as he is staying in Mumbai) of basic salary – Rs 12,500
- Excess of rent paid over 10 percent of salary (Rs 10,000 – Rs 2,500) = Rs. 7,500
Hence, the HRA exemption available is Rs. 7,500 per month.
How can I claim this exemption?
To claim this exemption, one needs to submit the rent receipts, a copy of the rent agreement and PAN of the lessors to the employer. The employer considers the same in Form 16.
Can I claim HRA as well as interest deduction on Home loan?
Yes, you can claim your home loan interest deduction as well as HRA exemption if you satisfy the abovementioned criteria.
Can I claim HRA even if my salary does not include HRA?
Yes. If you do not receive HRA from your employer, but you are making payments towards rent for the residential accommodation occupied by you, you can still claim the deduction under Section 80GG. However, you or your spouse or family even minor child / HUF must not own any property in the area/city where you currently reside/ work.
When is PAN of the landlord necessary?
The Income-tax department vide a circular, mandated to mention the PAN of the landlord in case the annual rent paid is more than Rs 1 lakh. In case the landlord does not have a PAN, you must obtain a declaration to this effect from the landlord along with the name and address of the landlord.
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