Understanding HRA: Tax Exemption and Deductions Explained

House Rent Allowance (HRA) is an allowance (part of CTC) given by your employer to help you cover the cost of living in a rented accommodation. 

Is HRA Taxable?

HRA is a part of your salary income and therefore, it is initially considered as your taxable income. However, if you live in a rented accommodation, you can claim a tax exemption either – partially or wholly under Section 10(13A) of the Income Tax Act. This is popularly known as HRA exemption. If you don’t live in a rented accommodation, this allowance is fully taxable.

Please note that the tax exemption of house rent allowance is not available in case you choose the new tax regime.

HRA for Self-Employed Individuals

Individuals who are self-employed cannot claim HRA but they can avail tax deductions towards the rented accommodation under Section 80GG.

HRA for Salaried Individuals 

Section 10(13A) of the Income Tax Act allows salaried individuals to claim exemptions for House Rent Allowance (HRA). As this allowance is a significant part of an individual’s salary, it is important to follow the company’s policies regarding the claiming of HRA. Rule 2A of the Income Tax Rules prescribes the quantum of exemption admissible.

How to Claim HRA Exemption?

To claim HRA exemption, you must meet the following conditions:

• Live in rented accommodation.
• Receive HRA as part of your CTC
• Submit valid rent receipts and proof of rent payments.
• The HRA exemption calculation will depend on various factors like salary, rent paid, HRA received by the employee and city of residence of employee.

How to Calculate HRA Exemption?

The lowest of the following amounts can be claimed as HRA exemption:

• Actual HRA received 
• 50% of [basic salary + DA] for those living in metro cities (Delhi, Kolkata, Mumbai or Chennai)
• 40% of [basic salary + DA] for those living in non-metros
• Actual rent paid (-) 10% of [basic salary + DA]

Can I Claim HRA and Deduction on Home Loan Interest?

Yes, you may claim both HRA exemption and home loan interest deduction.

There can be two situations where you are living in a rented house while owning a house. 

The rented house and the owned house are located in the same city

Here, you need to justify the claim of deduction with valid reasons, i.e., why you are not living in your own house. One case may be that the office location is very far from the house you own. This way, you can claim both HRA and Home loan benefits subject to the fulfilment of applicable conditions.

The rented and owned house is located in different cities

Here, you are eligible to claim tax benefits if you had to shift to another city due to job requirements.

When Do You Need a Landlord’s PAN?

If you have taken a house on rent and are making a payment of over Rs.1 lakh annually – remember to provide the landlord’s PAN. Else, you may lose out on the HRA exemption.

Landlords without a PAN must sign a self declaration stating he does not have a PAN, as per circular No. 8/2013 dated 10 October 2013.

Tenants paying rent to NRI landlords must remember to deduct TDS of 30% before making the payment towards rent. 

What If I Don’t Receive an HRA?

If you pay rent for living in a residential accommodation but do not receive an HRA from your employer, you can still claim the deduction under Section 80GG. Conditions that must be fulfilled to claim this deduction:

1. You are self-employed or salaried
2. You have not received HRA at any time during the year for which you are claiming 80GG 
3. The expenditure incurred by you on rent of accommodation should exceed 10% of your total income
4. You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation where you currently reside, perform duties of office or employment or carry on business or profession.

If you own any residential property other than the place mentioned above, you should not claim the benefit of that property as self-occupied. The other property would be deemed to be let out to claim the 80GG deduction.

Illustration

Mr Manav , employed in New Delhi, has taken up an accommodation on rent for which he pays Rs.15,000 per month during the Financial Year (FY) 2023-24. He receives a basic salary of Rs.25,000 monthly and DA of Rs.2,000, which forms a part of the salary. He also gets an HRA of Rs.1 lakh from his employer during the year.

Let us understand the HRA component that would be exempt from income tax during FY 2023-24. As per the given data, calculate the following:

HRA would be the lowest of the following:

• HRA received – Rs.1 lakh
• 50% of basic salary and DA – Rs.1,62,000 (50%*(Rs 25,000+Rs 2,000)*12 months)
• Rent paid minus 10% of salary- Rs.1,47,600 

Therefore, the entire rent amount of Rs.1,80,000 paid by Mr Anwar is not directly exempt. It involves calculations, and the lowest of the three calculated amounts will be exempt from income tax.

Therefore, the entire HRA received from the employer is exempt from income tax.

How to Claim Deduction Under Section 80GG?

The least of the following will be exempted from tax:

• Rs.5,000 per month;
• 25% of adjusted total income*;
• Actual rent should be less than 10% of adjusted total income*

*Adjusted total income is calculated as Gross total income after adjusting deducting all deductions except deduction under section 80GG.