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What is House Rent Allowance (HRA)?

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3 Mistakes salaried do while claiming HRA as a Tax deduction

3 Mistakes salaried do while claiming HRA as a Tax deduction

What is House Rent Allowance ?

HRA or House Rent Allowance is a salary component paid by the employer to compansate expense for renting a place for residential purposes . HRA is an integral part of a person’s salary. HRA applies to both salaried as well as self – employed individuals . According to rule 2A of the Income Tax Rules, HRA for salaried individuals is accounted for under section 10 (13A) of the Income Tax Act. Similarly , self-employed individuals are not taken into consideration for HRA exemption under this section but can claim tax benefit under section 80GG of Income Tax Act.

If you do a job, then you must know about the House Rent Allowance and are also taking advantage of it. This is an important part of your salary which is available in the form of allowance. Salaried Individuals have to claim HRA. You get tax benefit on house rent allowance. If you do not live in a rented house, then you will have to pay tax on this allowance. The benefit of deduction is available on HRA under section 10(13A) of the Income Tax Act. There is no limit to this. How much deduction will be available on HRA depends on your salary and HRA amount received from the employer.

Avoid the 3 mistakes below :

Tax expert Chirag Chauhan of CA Chauhan & Co Chartered Accountants said that it often happens that salaried individuals make three big mistakes while claiming HRA, due to which they get into trouble later. Avoid these mistakes.

1. Make sure to make a rent agreement

If you live by paying rent in the house which is in the name of your relative or family member, then you will get the benefit of house rent allowance. Many times it happens that due to the relative’s house, the rent agreement is not made. If your employer or tax department catches your eye, then the benefit of HRA deduction will be withdrawn. In this case, you will have to pay tax on this amount.

2. Transfer Online or Checkbook

 If you live in a rented house, then transfer money from your account to the landlord’s bank account only. Rent should not be paid in cash. If you pay more than Rs 5000 in cash, then it is necessary to put revenue stamp on every receipt. If you pay rent up to Rs 1 lakh in a financial year, then PAN of the landlord is not required. PAN number will have to be shared if the rent is paid more than that.

3. Must take rent receipt

 When you deposit the rent, then definitely get the rent receipt from the landlord. Your employer can prepare on the rent receipt. If this matter reaches the tax department, it will not accept the rent receipt. The tax department asks for more evidence. In many cases, the tenant pays more rent than the rent agreement. It is possible that in such cases the tenant deposits additional amount in cash. In this situation, the benefit of deduction will be available only on the amount for which you have the rent receipt.

How is tax exemption on HRA calculated ?

  1.  How much HRA is given by the employer.
  2.  If you live in metro cities then 50 percent of basic salary and dearness allowance.
  3. If you live in non-metro cities, then 40 percent of basic salary and dearness allowance.
  4. The amount of rent you have paid should be less than 10 percent of the basic salary and dearness allowance.

The least amount in the above four conditions will be exempted from tax.

Source

Read in Hindi at the below mention link

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Claiming HRA check AIS and ensure rent receiver file ITR

Claiming HRA check AIS and ensure rent receiver file ITR

The Income Tax Department has recently come up with Annual Information Statement. Annual Information Statement provode the assessee a comprehensive view of all the financial transactions made during the year, ‘Annual Information Statement’ aims to make the income tax return filing quite easy.

The Government has enlarged the scope of Form 26AS to cover information regarding various transactions made by a person during the year. The CBDT has omitted Rule 31AB, and a new Rule 114-I has been inserted to provide that the authorities will upload the Annual Information Statement (AIS) in Form No. 26AS in the registered account of the assessee. Such form shall consist of the following information:

  • Information relating to TDS and TCS;
  • Information relating to Specified Financial Transactions (SFT);
  • Information relating to the payment of taxes;
  • Information relating to demand and refund;
  • Information relating to pending proceedings;
  • Information relating to completed proceedings; and
  • Information received from any officer, authority, or body performing any functions under any law or information received under an agreement referred under section 90 or section 90A or information received from any other person to the extent it may be deemed fit in the interest of the revenue.

All such relevant information available in AIS shall be automatically pre-filled in the relevant ITR Form. ‘Annual Information Statement’ aims to make the income tax return filing quite easy. Out of various information categories covered under ‘Annual Information Statement’, in the present article, we will deal with one of the information categories, namely, rent payments.

What is HRA How is Tax Exemption from HRA Calculated?

HRA is the house rent allowance in income tax. It means the salary component received towards the rent payment and is allowed as a deduction from taxable salary under Section 10(13A).

The deduction available is the least of the following amounts:

  • Actual HRA received
  • 50% of [basic salary + DA] for those living in metro cities
  • 40% of [basic salary + DA] for those living in non-metros
  • Actual rent paid should be less than 10% of basic salary + DA

For Instance

Mr X, 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) 2020-21. 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 2020-21. As per the given data, calculate 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 HRA received from the employer is exempt from income tax in the above example.

How to Claim HRA When Living With Parents?

A person can pay rent to his/ her parents and claim the House rent allowance provided. He/ she has to enter into a rental agreement with the parents and transfer money to them every month. This way, the assessee can save on taxes. Also, the assessee’s parents need to report the rent received as income in their income tax returns. If their other income is below the basic exemption limit or taxable at a lower tax slab, they can save tax on the family income.

Is it Mandatory for the landlord to file the return of income?

‘Annual Information Statement’ will grab information, under the category ‘Rent Payments’ on the basis of information provided by the tenant at the time of claiming HRA. The Annual Information Statement will provide the Amount of HRA exemption claimed by the Tenant with the employer but the landlord is required to disclose full amount of rent received.

For Instance

Mr X, employed in New Delhi, has taken up an accommodation on rent from Mr. Y for which he pays Rs. 15,000 per month during the Financial Year (FY) 2020-21. 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 2020-21. As per the given data, calculate 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

In the above case Mr. X will claim HRA exemption of Rs. 1,00,000 which will get reflected in Annual Information Statement of Mr. Y, but Mr. Y has to disclose total rent received Rs. 1,80,000 (Rs. 15,000*12)

In case inspite of the rent being reflected in the Annual Information Statement and the assesse fails to file the return than he shall be considered as assessee in default

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Paying rent to your parents to claim HRA? Know what all documents you should prepare

Paying rent to your parents to claim HRA? Know what all documents you should prepare

Rent expense is the cost incurred by a business to utilize a property or location for an office, retail space, factory, or storage space. Rent expense is a type of fixed operating cost or an absorption cost for a business, as opposed to a variable expense.

Rental expenses are often subject to a one- or two-year contract between the lessor and lessee or a landlord and tenant, with options to renew. Salaried individuals, who live in rented houses, can claim the House Rent Allowance (HRA) to lower their taxes – partially or wholly under the Income Tax Act. The deduction available is the least of the following amounts:

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

The eligibility criteria to avail HRA exemption is

  • The person should be a salaried employee. Self-employed professionals cannot avail the deduction. 
  • He has the HRA component in his salary structure.
  • He should be living in rented accommodation. The rented premises must not be owned by the person claiming the tax exemption. The cost for maintenance works, such as structural repairs, whitewashing, and painting shall be borne by both the tenant and the landlord. While the major chunk of the expenses is usually borne by the landlord, the agreement has to state which party will bear the expenses for specific items. Tenants are generally responsible for their own electrical bills or water charges so long as their lease agreement does not dictate otherwise.
  • Rent has to be actually paid – If you are staying on rent, you should actually pay the rent amount to the landlord and there should be adequate (proof of payment proof of payment like bank receipt (cash are not considered in scrutiny). Mere declaration and submission of rent receipts without transfer of money can’t be taken as sufficient proof to claim HRA benefits.

Let us refer the following example:-

Consider the scenario of an individual, Mr X

He earns a basic monthly salary of Rs. 30,000, Medical allowance of Rs 2,500, other allowances of Rs 2,500 and HRA of Rs 15,000. He pays Rs 12,000 as rent for accommodation in Mumbai.

  • Actual HRA received = 15000*12 = Rs 180,000
  • Actual rent paid annually over 10% of annual salary = 12000*12=144000-10% of [(30,000 x 12)] = Rs 1,08,000
  • 50% of salary (metro city) = [(30,000 x 12) x 50%)] = Rs 180,000

Rs 1,08,000 is the least value obtained out of the three methods. Thus, the amount of HRA exempt will be Rs 1,08,000.

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Can I pay rent to my parents and claim HRA?

Yes, one can claim the HRA exemption by paying rent to their parents. It is always advisable to have a rent agreement. One would require rent receipts in order to claim HRA exemption. Also, your parents need to show rental income from you in their income tax return. Therefore, those who live with their parents can pay rent to their parents and save tax on HRA.

What are the necessary documents required to claim HRA?

To claim HRA, one has to submit important documents like:-

  • Rent receipts –
  • Rent Agreement – When you pay rent to your parents for living in their home, they become your landlord. The Income Tax department requires proof for this. A rent agreement between you and your parents is this proof. The agreement should be signed by both you and your parents. It should contain other details, such as the premises that are rented by you, whether the payment is made monthly or yearly, and whether you make payments towards utilities as well. 
  • PAN No of the landlord – If your annual rent payment exceeds Rs 1 lakh, you are required to provide the PAN card details of your landlord, in this case, your parents, to your employer. If your parents do not have a PAN card, they need to give a declaration stating the same. They should also fill out Form 60, and you need to submit the declaration along with this form to your employer. Without doing either of these, you cannot claim tax exemption on your HRA if the rent paid is above Rs 1 lakh annually.
  • Name of the landlord and tenant
  • Address of the rented accommodation
  • Duration of stay
  • A revenue stamp
  • Signature of the landlord on the revenue stamp

Parents Must Pay Tax on Rental Income

The rent paid by you becomes a source of income for your parents. They must declare this and pay taxes on the same. It should be included under ‘Income from House Property.’ They can claim an exemption on the property taxes paid by them. They can also deduct 30% of the rental income as maintenance expense. Paying rent to your parents and claiming HRA exemption is only beneficial under certain scenarios.

  • If your parents do not have any other source of income apart from the rent, then you save money as a family. The rental income can be settled as an amount that is below the taxable income. You get HRA exemption, and your parents do not have to pay taxes.
  • Even if your parents have other income sources, if their income puts them at a lower tax bracket compared to yours, it is still a profitable arrangement. For example, if you are in the 30% tax bracket, but your parents are in the 10% bracket, you save 20% of the tax on the rent.

Why should I need to submit rent receipts to the HR Department?

  • As per the Income Tax rule of India, every person who pays salary is required to deduct tax at source (TDS), deposit with the government and then pay the remaining amount to the employee.
  • During this process, if any employee makes a tax saving investment then the person liable for deducting tax has to consider and give the benefit of that investment and then deduct the tax on the net amount.
  • Usually, it has been seen that people present fake rent receipts, even when they are not living in rented accommodation. So, to counter this, HR departments have begun asking for rent agreements for giving HRA benefits.
  • Normally, every employer has its own last date or deadline by which all investment proofs documents must be submitted.
  • Extra TDS will be deducted from the take-home salary if the employee misses the deadline. However, the employee can claim the extra TDS deduction directly from your income tax return.

Can I claim both home loan deduction and HRA?

Yes, If you are a homeowner and you are paying back your home loan, you can claim HRA if you live in a rented property. You are allowed to get both the benefits to reduce your taxable income.

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Can you claim both HRA and Home Loan Interest Deduction in Income Tax?

Can you claim both HRA and Home Loan Interest Deduction in Income Tax?

What is House Rent Allowance (HRA)?

HRA is an amount which is paid by employers to employees as a part of their salaries. HRA is an exemption provided, only if the employee is living in rented accommodations. In case the employee lives in his/her own house and does not pay any rent, he/she cannot claim HRA to save on taxes.

How is HRA computed?

HRA depends on the salary of the employee. HRA shall be the least of the following:-

  1. Excess of rent paid annually over 10% of annual salary
  2. 50% of Basic salary (in case residence is in a metro city) or else 40% of Basic salary (in case residence is in a non-metro city)       
  3. Actual amount allotted by the employer as the HRA
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Is any deduction available w.r.t interest on loan for purchase/construction of house property?

Homeowners can claim a deduction on their home loan interest, if the owner or his family resides in the house property under section 24 of Income Tax Act, 1961 while computing ‘Income From House Property’.

Interest deduction is restricted to Rs 2 lakhs under Section 24. However, deduction on interest is limited to Rs. 30,000 instead of Rs 2 lakhs if both the following conditions are satisfied:-

  1. The loan is taken on or after 1st April 1999
  2. Purchase or construction is not completed within 5 years from the end of the FY in which loan was taken

What are the instances where a person will require the benefit of HRA as well as interest deduction under section 24?

Provided below are some of the common instances, where a person will require the benefit of HRA as well as interest deduction under section 24?

  1. where a person may be working in a different city and paying rent there but the family stays in a different city in a house for which the person may be paying interest as well
  2. where a person owns the house smaller in size but may be staying in another house on rent which is bigger and fit for his requirement
  3. where a person may have bought the house but may not be able to shift immediately due to vicinity of the existing school of the children where he is staying on rent, etc.

The primary test is if the person is living in Rented House and has person paying rent on property. In that case a person can claim HRA irrespective he claims interest on housing loan

Can You Claim Both HRA And Home Loan For Tax Exemption?

For instance, there can be a situation where a person works in one city where he/she lives on rent, and his/her family resides in another city, where the person has bought a home where his/her family is residing.

Homeowners, who are paying back their home loan and getting HRA as part of their salary, can avail both the house property related tax benefits to lower their taxable income.

Let us understand the same with the help of an example:-

Mr A lives in Mumbai and pays a rent of Rs 15,000 p.m. He gets an HRA of Rs 18,000 p.m. His basic salary is Rs 60,000 p.m. Mr. A has taken a loan to buy a house in Delhi where his parents currently reside. The interest he pays on the loan for his house is Rs 18,000 p.m.

Computation of HRA

Mr A can claim deduction of HRA while computing his salary income. HRA deduction per month shall be least of:-

  1. Actual HRA received = Rs 18,000
  2. 50% of Basic salary since he lives in Mumbai = Rs 30,000
  3. Rent paid – 10% of Basic Salary = Rs.15,000 – Rs. 6,000 = Rs. 9,000

Therefore HRA exempt = Rs.9,000 per month. Remaining HRA of Rs 18,000 – Rs 9,000 = Rs.9,000 per month will form part of his taxable income under Salaries on account of HRA.

Computation of Income from House Property

ParticularsAmount
Gross Annual Value (GAV)Nil (as the property is not let out)
(-) Deduction u/s 24 
Standard Deduction @30%Nil (as GAV is nil)
Interest (18,000 * 12) restricted to Rs 2 lakhs(2,00,000)
Income from House Property(2,00,000)

Net Loss of Rs 2 lakhs will be added to his taxable income under the head ‘Income from House Property’

As both home loan interest tax exemption and HRA fall under different sections, assessees are allowed to claim both HRA and home loan benefits. The income tax department has made provisions to ensure citizens owning a house can avail the benefit of interest deduction but if you are also staying in a rented flat then you will not miss out on tax benefits. 

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