All You Need to Know regarding House Rent Allowance and its Exemption

House Rent Allowance

So, you are living in a rented accommodation and receiving House Rent Allowance(HRA) as part of your salary but don’t know how to get the amount received as HRA exempted under Income Tax Act. Let me help you on this!

First of all let us answer some questions first.

What is House Rent Allowance?

Usually in big cities, it is common that people out to live in a rented accommodation as they are not the local resident of that place. The companies usually pay out salaries in the form of allowances, one of which is called as House Rent Allowance. This enables employees to claim the benefit of income tax deduction on such allowances.

How HRA helps to save tax?

HRA income tax exemption can be claimed by employee only when he lives in a rented accommodation and usually HRA is a big component in your salary. So if you living in a rented house and are able to get the HRA exempt from tax, then what more do you need. The best part is that if you are receiving any amount in HRA, you can get the whole amount exempt from tax. Let me show you how!

How is calculation of HRA Exemption done?

Least of the below amount is exempted from tax:-

  1. Actual HRA received,
  2. Actual Rent Paid – 10% of (Basic Salary + Dearness Allowance)),
  3. 50% of Basic Salary + Dearness Allowance (if you live in Metro city), else 40% of Basic + DA.

Can you give me an example please?

Suppose, Ankit is living in a rented accommodation in Gurgaon (oh sorry! Gurugram). He pays 25,000 for a 3BHK flat. His Basic Salary is 40,000 and receives a Dearness Allowance of 20,000 per month. He receives HRA from his employer @ 25,000 per month. So as per above nos. we can derive the least amount that can be claimed, by calculating the below parameters.

  1. Actual HRA received – 25,000*12 = 3,00,000
  2. Actual Rent Paid(25,000 * 12) – 10% of (Basic(40,000*12) + DA(20,000*12) i.e. 3,00,000 – 10% (7,20,000) i.e. 3,00,000 – 72,000 = 2,28,000
  3. 40%(since Gurugram is non-metro) of (Basic Salary (40,000*12) + DA (20,000*12) i.e. 40% * (7,20,000) i.e. 2,88,000

Hence out of 3,00,000 rupees of HRA received, Rs.2,28,000 (least of above three) is exempt from tax. If you fall in 30% income tax bracket, that simply means that you saved Rs. 68,400 in income tax. HURRAY!! this is huge saving.

Do I need Landlord Pan no. in this case!!

This is definitely a good question and the answer is YES. If you pay more than Rs 1,00,000 by way of rent in any financial year, you would need to submit the PAN no. of your landlord to your employer. If you do not submit the PAN no., you whole amount in HRA would be taxable.

What documents I need to submit to employer while claiming HRA exemption?

Usually at the start of January  in any financial year, employer asks you to submit your actual investment proof to claim income tax deduction. The documents you should keep handy would be Monthly Salary Payment receipts with signature on revenue stamp (they accept quarterly receipts too), PAN no. of Landlord (if PAN no. is not available, then declaration by Landlord for not having PAN), Rent Agreement (they ask this very rare, but good to keep it). Nothing Else!!

Hope the above article clarify some of your doubts, in case of any questions/suggestions, do reply!!

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Author: AK

Ankit is a part-time blogger with full-time employment in an investment bank. He is a CA with interest in personal finance topics.

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