House Rent Allowance (HRA) Entitlement under Section 10

In the absence of sufficient knowledge of key tax exemption opportunities like House rent allowance (HRA), we may end up losing out on valuable saving and investing opportunities. So, let us learn about HRA and how it helps us get tax exemption.


What is House Rent Allowance (HRA)
House Rent Allowance is an allowance given by an employer to an employee. The sole purpose of this is to meet the cost of renting a home.

Are you eligible to claim HRA?
You can claim HRA under Section 10 if you fulfill these three conditions:  

• You have an HRA allowance as part of your salary package.
• You are staying in a rented accommodation and paying rent for it. 
• The rent exceeds 10% of your salary. 

What about rent paid to parents / spouse?

• You can claim rent given to your parents. Let's say you live with parents and pay them rent. This makes your parents the landlords. One of them will have to declare it in his/ her personal income tax return to prevent litigation in the future.
• You cannot claim rent paid to spouse. The relationship between a husband and wife is not commercial in nature; a husband and wife are supposed to stay together. So payment of rent to a spouse will not be accepted by the income tax authorities.

Rent Receipts
You will need to keep all your rent receipts since it is the only proof that you are paying rent. HRA exemptions are only available on submission of rent receipts or the rent agreement. However, if the HRA is up to Rs 3,000 per month, then receipts/ agreement is not mandatory. It is only when your HRA exceeds this amount that you will have to keep the receipts.
But it is wise to still keep them because, at the time of assessment, the Income Tax Officer may demand the receipts/ agreement.

Entitlement of HRA
The actual HRA you will be entitled to will be the least of the following:

• The actual amount of HRA received.
• 40% of salary. This increases to 50% if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata.
• Rent paid minus 10% of salary (basic component + dearness allowance)

An illustrative example
Assumptions
HRA per month = Rs 18,000
Basic monthly salary = Rs 40,000
Dearness Allowance = Nil
Monthly rent = Rs 15,000 
Rental accommodation is in Delhi.

Exemption Calculation
Case 1 : Actual amount of HRA = Rs 18,000
Case 2 : 50% of salary(40% if not residing in 4 metros) = 50% x (40,000 + 0) = Rs 20,000
Case 3 : Actual rent paid - 10% of salary = Rs 15,000 - [10% of (40,000 + 0)] = 15,000 - 4,000 = Rs 11,000

Rs 11,000 being the least of the three amounts will be the exemption from HRA. The balance HRA of Rs 7,000 (18,000-Rs 11,000) is taxable.

What if your employer does not give HRA or you are self employed?
HRA is an exemption under section 10(13A) of the Income Tax Act, and this applies to you provided certain conditions are met, as we discussed above. One such condition was that your employer actually gives you a house rent allowance. But what if you are an employee, but your employer does not give you an HRA or if you are self-employed? In such a case, you certainly won’t qualify for an HRA exemption under Section 10. 

But, there’s another section in the Indian Income Tax Act, called Section 80 GG, which comes to your rescue. Of course, you won’t get an HRA exemption, but you could qualify for a deduction for the rent paid by you. Not many people are aware of this deduction. Again, you need to qualify based on certain conditions.

We will study more about Section 80GG in our next post.

Cheers

Manoj Arora

Freedom can buy you what money cannot !!

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