Taxability of House Rent Allowance (HRA)

 

Taxability of House Rent Allowance (HRA)

House Rent Allowance (HRA) is a component of the salary provided by employers to employees to cover rental expenses. The taxability of HRA is governed by Section 10(13A) of the Income Tax Act, which allows for certain exemptions under specified conditions. Understanding how HRA is taxed can help employees effectively manage their tax liabilities.

HRA Exemption Calculation

The exemption on HRA is determined by taking the least of the following three amounts:
  1. Actual HRA Received:
    • This is the total amount of HRA that an employee receives from their employer.
  2. Rent Paid Minus 10% of Salary:
    • This calculation involves taking the annual rent paid and subtracting 10% of the employee's salary (which includes basic pay and dearness allowance). The formula can be expressed as:
  3. Percentage of Salary Based on City:
    • 50% of Salary if the rented accommodation is located in metro cities such as Mumbai, Delhi, Kolkata, and Chennai.
    • 40% of Salary if the rented accommodation is located in non-metro cities.

Key Points Regarding HRA Exemption

  • If an employee does not pay any rent, the exemption on HRA will be zero, meaning the entire amount received will be taxable.
  • Employees living in their own houses or not paying rent will find their entire HRA taxable.
  • The exemption applies only for the period during which the rented house is occupied.

Example Calculation

Consider an employee who lives in Mumbai with a monthly salary of ₹30,000 and receives an HRA of ₹13,000 while paying a monthly rent of ₹10,000. The annual calculations would be as follows:
  1. Actual HRA Received:
  2. Rent Paid Minus 10% of Salary:
  3. Percentage of Salary Based on City:
    Since Mumbai is a metro city:

HRA Exemption Summary for the Example

Now we can summarize the exempt amounts:
  • Actual HRA Received: ₹1,56,000
  • Rent Paid Minus 10% of Salary: ₹84,000
  • 50% of Salary for Metro City: ₹1,80,000
The least value among these three amounts is:
Thus, the taxable portion of HRA would be:

Documentation Required for Claiming HRA Exemption

To claim HRA exemption successfully, employees must provide certain documentation to their employer:
  • Rent Receipts: Proof of rent payment should be maintained.
  • Rental Agreement: A formal agreement between tenant and landlord to substantiate claims.
  • If annual rent exceeds ₹1 lakh, the landlord's PAN must be provided.

Special Cases and Considerations

  • Employees can claim HRA even if they pay rent to family members (like parents), but proper documentation must be maintained.
  • If living in a rented house while owning another property in a different city or locality due to job requirements may allow claiming both HRA and home loan deductions.
  • Tax authorities may scrutinize claims for authenticity; therefore, maintaining clear records is essential.

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