The term HRA stands for House Rent Allowance and it is a part of an employees’ CTC. The amount of HRA that will be paid is decided by the employer, depending on the employee’s pay, wage structure, and city of residence. Both salaried employees and independent contractors are eligible for HRA.
Self-employed individuals, however, do not qualify for the HRA exemption under Section 10(13A) of the Income Tax Act of 1961. On the other hand, they may benefit from tax advantages on rental payments under section 80GG of the IT Act.
What is HRA?
An integral component of an employee’s compensation that the employer provides to offset the expenses of rental accommodation is the House Rent Allowance (HRA). You may only get an HRA exemption if you reside in a rental home. Rent allowance is partially taxed, even if it is a portion of your compensation. Section 10(13A) of the Income Tax Act of 1961 and Rule 2A apply to HRA exemption.
Before determining taxable income, the HRA exemption’s rent allowance amount is subtracted from the total payment. An employee may reduce their tax liability in this manner. The HRA received from the company is wholly taxed if an employee lives in their own home rather than renting out housing.
Exemption/Deduction for HRA
The HRA exemption rule is affected by many things.
- A city where you live (non-metro and metro cities for HRA)
- Getting HRA from the employer
- Rent paid by a worker
Employees who are paid a salary may use HRA to offset the annual income tax they are required to pay. The Income Tax Act states that the dwelling rent allowance exemption is calculated using the least of the following three factors:
- Actual HRA was paid
- If the employee lives in a metro area, they will get 50% of their income; if they do not, they will receive 40% of their compensation.
- 10% of the wage less the actual amount of rent paid.
The “base salary” is the wage that is considered while making calculations. To determine HRA exemption, “Dearness Allowance (DA)” is additionally included in the base income if the bonus or commission was earned depending on sales volume.
Employees are only eligible for the tax break while residing in the leased space.
Rules for HRA Deduction
- The staff must give the PAN card information to the landlord. It is only necessary, however, if the landlord receives more than Rs 1,000,000 in yearly rent.
- Rent receipts are required as evidence to benefit from the tax exemption.
- To be eligible for HRA benefits, paying rent to a landlord is not always essential. People may claim HRA exemption by paying rent to their family members (parents) and presenting the necessary paperwork.
- However, if you demonstrate rent to your spouse, you cannot claim HRA exemption. Income tax law does not permit this method.
- Employees who reside in their own homes are not eligible for a tax deduction for HRA.
- The person, spouse, minor child, or member of the Hindu Undivided Family (HUF) must not own any property to qualify for a tax deduction. In addition, no removal is permitted if a person owns a residential property elsewhere and receives rental income from it.
Information Regarding HRA Exemption Claims
Employees must include the amount on the employer’s declaration form at the start of the fiscal year to claim HRA exemption. If they cannot claim HRA via their employment, they may use the ITR-1 form when completing their tax returns.
To be eligible for tax advantages on HRA, employees must submit their rent receipts and the landlord’s PAN card information (if the total amount of rent paid in a fiscal year exceeds Rs. 1,000,000). The workers may use the same receipt for three months. You will thus want at least the latest four tickets for a given year.
Utilising Tax Benefits for Home Loans and Rent Allowances
If an employee lives in a rental home and has leased out their property to another person, they are still eligible for HRA rent and mortgage loan deductions. In this case, the employee is responsible for determining their income from the home loan-related property and paying the necessary taxes.
You are not eligible for HRA tax exemptions if you own and rent property in the same city. The employee must demonstrate that their property is located far from the employer’s location and cannot be utilised for residential purposes to be eligible for the tax advantage known as an HRA exemption.
Self-Employed HRA Exemption
Additionally, self-employed individuals are eligible for HRA tax exemptions and deductions (HRA). Section 80 GG permits them to get benefits. When they do not get HRA, salaried workers may also utilise this part to seek tax exemptions.
HRA Tax Benefits Claimed in Certain Special Cases
Paying a member of the family’s rent
The rental property cannot be owned by the individual requesting the tax exemption. You may utilise the rent payment as an HRA deduction from your wages if you live with your parents and pay them rent. But you can’t pay your spouse’s rent. Make sure you have a written record of the financial transactions if you rent a home from your parents.
Therefore, it is essential to maintain track of your banking transactions and rent receipts since the tax office may deny your claim if they are uncertain that the transactions are legitimate. Additionally, the rent you pay to your parents is included in their taxable income for the year.
The worker lives and works in a separate city while owning a home there
Let’s say you work in a different town or your house is leased out. In such a situation, you may simultaneously benefit from the house loan’s deductions for “interest paid,” “principal repayment,” and HRA deduction.
Employees who live in rental housing but are not eligible for HRA
Some workers’ pay structures may not include an HRA component. A non-salaried person could also be responsible for paying rent. They are given relief under Income-tax Act Section 80(GG). Under Section 80(GG) of the I-T Act, a person who pays the rent for furnished or unfurnished accommodation may deduct the rent. They cannot, however, get HRA as part of their pay.
Rent is paid by many family members
Assume that both partners are employed and pay a portion of the rent. If they each have individual rent receipts, they may both submit a claim for the tax credit associated with the HRA. Employees should use caution to prevent any duplicates or inconsistencies. But only one is eligible for the tax break for a single rent payment.
How to Request an HRA Exemption for Parental Rent Payments Without Arousing the Anger of the Department
Here is a brief explanation of how to seek an HRA exemption for parent-paid rent.
You have just secured your ideal job and are looking forward to receiving your first paycheck. But when you do get your pay, you find that the tax deductions have reduced your take-home pay. At this point, you begin to appreciate the value of tax exemptions and make preparations for them.
The HRA, or House Rent Allowance, is one of the most straightforward yet misunderstood exclusions. You can decide to move in with your parents if you work in the same city. In such instances, it makes sense for you to pay your parents’ rent while claiming the exemption. While making this assertion, a few factors must be considered.
1. Rent Confirmation
Your parents become your landlords when you pay rent to live in their house. For this, the Income Tax Agency wants evidence. This evidence is a lease between you and your parents. You and your parents must both sign the contract. Other information should be included in the location you are renting, whether the payment is made annually or monthly and if you also pay for utilities. The document must be unambiguous.
2. Who Owns the Property?
Your parents must own the property since the rent agreement names you as the renter and them as the landlord. Both of them or just one of them may jointly own it. Whatever the situation, it must be expressly stated in the lease and the documentation proving ownership of the property.
Paying your rent does not qualify for an exemption. You won’t be prepared for exemptions if you and your parents jointly own the property. One of the most frequent errors while requesting an HRA exemption is this one.
3. Rent Invoices
The Income Tax Division will be able to verify that you paid the payments in some way. Rent receipts must be presented as evidence. Additionally, avoid paying in cash and be sure to use a bank transfer or check to prevent any misunderstandings or issues down the road.
In addition to the rent receipts, there should be a clear paper record of all payments made. The rent amount, length, and extra fees, such as those made to cover utility costs, should all be clearly stated on the invoices.
4. Landlord’s PAN Information
You must provide your employer with the PAN card information of your landlord, in this example, your parents, if your yearly rent payment exceeds INR 1 lakh. Your parents must state that they do not own a PAN card. They should also complete Form 60, which you must send to your employer alongside this form and the declaration. If the rent paid exceeds INR 1 lakh yearly, you cannot claim tax exemption on your HRA without performing one of these.
5. Live on the designated property
Many people are tempted to abuse the rule that exempts rent payments made to parents from the HRA. But be aware that the Assessing Officer may visit the location to verify that you live at the listed address. If they discover that you lied, you will not be qualified for the exemption, and the whole HRA amount will be subject to tax.
6. Taxes are due from parents on rental income.
Your parents use the rent you pay as a source of money. They have to disclose this and pay taxes on it. It needs to be categorised as “Income from House Property.” They are eligible to request an exemption from paying property taxes.
Additionally, they can deduct 30% of rental revenue for maintenance costs. Renting from your parents and claiming an HRA exemption is only advantageous in limited circumstances.
- If your parents make enough money to pay the rent, your family starts saving money. It is possible to settle the rental revenue for less than your taxable income. Your parents are not required to pay taxes since you are exempt from the HRA.
- Even if your parents have other sources of income, if their income puts them in a lower tax band than you, the arrangement is still advantageous. For instance, if your parents are in the 10% tax bracket but in the 30% tax bracket, you will save 20% on your rent taxes.
Determine the HRA Exemption
You must know how much of your HRA may be excused to ensure you genuinely save money by paying your parents’ rent. The first of the following three amounts, this one is the least.
- The real HRA, your company, actually pays you.
- 50% of your wage for metro inhabitants and 40% of your earnings for non-metro residents.
- The gap between your yearly rent payment and 10% of your income.
Decide which of these three figures is the lowest, and that amount will be excused. The remainder of the sum is subject to tax.
HRA Exemption: How to Apply?
An innovative strategy to lower your tax burden is to use HRA exemptions on rent paid to parents. You may reduce your family’s tax burden by doing some math and cautious preparation. The secret is to approach it ethically, methodically, and honestly. It will help if you use caution while using this exception.
Double-check that you have all the required paperwork as you apply for the exemption. Several internet tools may assist you with the correct format if you are confused about how the rent agreement or rent receipt should be written.
It would help if you did the following: research, save all receipts meticulously, pay on time, and use a check or a bank transfer for the payment. You may quickly request the exception that is legally yours.
The typical house rent allowance is not typically taxed and is included in one’s pay. Learn about the HRA regulations and use this exemption to reduce the income tax withheld from your gross pay.
Use an HRA calculator to determine how much money has been saved by claiming this exemption. Also, remember that you cannot use this exemption advantage if you are getting HRA and living in your apartment.