Scenarios Where You Can Benefit from HRA Deduction

Here’s how you can benefit from the HRA deduction

Many of us, at some point dream of living in our “own house”, until then we make good of the rented house. While you continue to dream of owning your own space, your rented property may help you save some taxes which can be used to build a corpus to help you achieve your dream at a faster pace. The HRA (House rent allowance) was introduced to provide relief to those individuals who have to shell out a sizeable amount in the name of rent in today’s times when the rents are increasing in a fast-paced manner. Here, we discuss the various ways in which you can benefit from HRA. Before that, we understand the nuances of HRA HRA amount.

HRA exemption for salaried individuals

HRA is a component of your salary stack that is extended to enable you to benefit from the rental expenses incurred by you every month. It is an easy means to reduce your tax liability. HRA is covered under section 10-13 A of the Income-tax Act (India), 1961. The least of the following is allowed as an exemption for salaried individuals – 

• Actual HRA amount received from the employer
• 50% of basic salary (including DA- Dearness Allowance) – for metro cities (40% otherwise)
• Rent paid – 10% of basic salary (including Dearness Allowance)

Here is a simple example to illustrate the HRA deduction calculation

Abhishek working in an IT firm in Delhi, lives in a rented 1BHK apartment, he has the following details :

• Basic salary – Rs. 40,000 per month
• Dearness Allowance – Nil
• HRA component – Rs. 10,000 per month
• Actual rent paid – Rs. 12, 000 per month

Substituting the above numbers to the 3 conditions:

• Actual HRA received from the employer – Rs. 10,000
• 50% of basic salary – Rs. 20,000
• Actual Rent paid – Rs. 12,000

The least of the above is Rs. 10,000 per month. Abhishek would be eligible to claim Rs. 1.2 Lakh per financial year as HRA exemption. 

The above scenario and calculation are applicable for a salaried individual, where HRA forms a part of the salary stack. There may be scenarios where the individual could be – 

1. Self–employed
2. Individuals with salaries without any HRA component

In both these scenarios, you are to claim HRA deduction under section 80GG. The conditions for 80GG calculations are: 

1. Rs. 5000 per month
2. 25% of adjusted total income
3. Rent paid – 10% of adjusted total income

To illustrate the above scenario, let us consider Ms. Rajini who is a self-employed individual with the following details

Turnover – Rs. 40000 / month

Rent payable – Rs. 10,000 / month

Based on the criteria under 80GG

1. Rs. 5000 per month
2. 25% of adjusted total income – 25% * 40000 = 10000
3. Rent paid – 10% of adjusted total income – Rs. 10,000 – (10% * 40000) = Rs. 10,000 – Rs. 4000 = Rs. 6000

The least of the above is Rs. 5000 per month, amounting to Rs. 60,000 per annum.

To read more about HRA deduction, tap on the link below:

https://www.turtlemint.com/save-tax-on-house-rent-allowance/

There are some nuances that one should take note of whilst making HRA claims:

• HRA Claims in excess of Rs. 1 Lakh:

If the annual rent exceeds Rs. 1 Lakh, as a tenant claiming HRA, you will have to submit a copy of your landlord’s PAN card copy as part of the HRA deduction claim. This is in addition to the rental receipts that serve as proof of rent. 

• HRA claim alongside home loan:

There may be instances when you have a home of your own but you may continue to dwell in rented accommodation. This is allowed when you are in a different city for work purposes and hence, are not able to stay in the home that you have bought in a different city. Both home loan benefits and HRA can be claimed in such circumstances. The benefits that can be claimed are:

• Principal repayment of the home loan – up to Rs. 1.5 Lakh under section 80C

• Interest paid on a home loan up to Rs. 2 lakhs under section 24(b)

• Additional deduction towards stamp duty for the value of the house (for first-time homebuyers) restricted up to Rs. 45 lakhs. An HRA deduction up to Rs. 1.5 lakhs under section 80EEA, this is in addition to the deduction of Rs. 2 lakhs which can be claimed under section 24 (b)

• In addition to all of these, HRA exemption under section 10-13A can be claimed.

To make this composite claim, you will have to provide proof of different locations of rented homes and owned home in two different places. If you have let out the property which you own in the other city, then your rental income will be taxable as income from house property.

• HRA claims when living with parents:

If the property is in the name of your parents and you continue to live with them, you can still claim HRA exemption as applicable. A rental agreement with parents and yourself have to be established for the amount of rent paid every month. Your parents have to issue a rental receipt for the rent paid which can be claimed as an HRA exemption. 

There are some HRA exemptions applicable:

• HRA amount should not exceed 50% of the basic salary
• Rent paid to the spouse cannot be claimed as an HRA exemption
• A TDS of 30% on the rent paid if the landlord is an NRI, the TDS thus deducted should be declared to the income tax authorities
• HRA deduction or exemption should be effectively mentioned in the income tax returns.

To claim HRA exemption you will have to submit a rent agreement, rental receipts for each month, and a PAN card copy of the landlord (if rent paid exceeds Rs. 1 lakhs). Hope you can avail yourself of HRA benefits under all scenarios with the help of this note.