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Income Tax (IT) treatment of House Rent Allowance (HRA)

Most of the salaried people get an allowance for taking care of the rent that they pay for their home. This is called House Rent Allowance, or HRA.

HRA gets special treatment in income tax laws, and is exempt from income tax to a certain extent. Here are the rules explained in simple terms.

If you are like most other salaried people, one of the components of your pay would be House Rent Allowance, or HRA. This is an allowance paid to the employee to defray the housing rent expense.

Since housing is one of the fundamental needs for us, the government treats it sympathetically, and gives us various tax breaks towards it.

Thus, you get income tax benefit when you take a home loan to buy a house. (Please read “Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage” for more details on this).

Similarly, there are income tax benefits on the House Rent Allowance (HRA) as well. The tax benefit on HRA is available under section 10 (13A) of the IT Act.

 

How much Income Tax (IT) exemption is available

The minimum of the following three is available as exemption from your income:

1. The actual HRA received from your employer

2. The actual rent paid by you for the house, minus 10% of your salary (this includes basic + dearness allowance, if any)

3. 50% of your basic salary (if you live in a metro) or 40% of your basic salary (if you live in a non-metro)

 

Example

Let’s take the following example:

Basic: Rs. 15,000
DA: Rs. 5,000
HRA: Rs. 9,000

Rent paid: Rs. 10,000

You live in Mumbai.

Now let’s evaluate the above rules:

1. The actual HRA received from employer

This is Rs. 9,000

2. The actual rent paid for the house, minus 10% of salary

This would be Rs. 10,000 – 10% of (Rs. 15,000 + Rs. 5,000) = Rs. 10,000 – Rs. 2,000 = Rs. 8,000

3. 50% / 40% of your basic salary

Since you live in a metro, this would be 50% of Rs. 15,000 = Rs. 7,500.

The minimum of 1, 2 and 3 is Rs. 7,500. Therefore, the amount of HRA exempt from tax is Rs. 7,500 per month.

The remaining HRA amount of Rs. 1,500 (Actual HRA received Rs. 9,000 – exempt HRA Rs. 7,500 = Rs. 1,500) would be added to your income, and would be subject to income tax.

 

Who can claim HRA exemption

There are certain conditions that should be met for claiming IT benefit on HRA.

You can claim HRA exemption towards the rent paid by you, if:

  • You receive HRA as part of your salary
  • You pay the rent
  • You stay in the rented house for which you pay the rent
  • You do not own the house for which you are paying the rent

Thus, for example, you are paying the rent for a house in which your parents stay, but you stay in a different house. Then, you can not claim exemption for that. You yourself should be an occupant of the house.

 

Documents needed to claim HRA exemption

If the HRA you are claiming is less than Rs. 3,000 per month, no proof is needed. But if the amount you are claiming is more than Rs. 3,000 per month, you would need the following:

  • Rent receipts
  • Rental agreement

 

HRA and Home Loan

Many people get even more confused when it comes to HRA and home loan together. But it is quite simple, really.

In a nutshell: There is no restriction in the Income Tax (IT) Act about claiming home loan and HRA benefits together.

If you are staying in a rented accommodation, and have taken a home loan for purchase of a house, you can claim benefit for both HRA and the principal and interest components of the home loan.

(Please read “Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage” for more on IT benefits that you can get using a home loan).

You can claim these benefits even if you have rented out the house you have purchased through a home loan, and are yourself living in another rented accommodation.

The city where you own a house and the city where you work also has no significance: There can be different cities, or can be the same.

Note: Some companies insist that to claim HRA exemption, you would need to provide a declaration stating that in spite of owning a home, you are staying in a rented house due to a genuine reason.

Following are some of the reasons considered genuine:

  • The house you own is not conveniently located with respect to your workplace
  • Your parents are living in the house you own. So, you have to stay in a rented place.
  • The house you own is small. So, you have to rent a bigger house.
  • You have rented out the house you own. And you stay in another house that you have taken on rent.

 

Other important points to keep in mind

  • You can claim exemption for the rent paid to your parents, provided you actually pay the rent. You should get rent receipts for the same. Also, your parents would need to declare this income in their IT returns.
  • You can not claim rent paid to your spouse.
  • Only one of the spouses can claim HRA exemption – not both.

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