House Rent Allowance (HRA)

What is House Rent Allowance (HRA)?

House Rent Allowance (HRA) is a special allowance granted to employees by companies to meet expenditures they incur on residential accommodation. This allowance varies based on the area of residence and is usually tax-exempt.

According to the Income Tax Act 1961, this will not fall under tax exemption in the following cases:

• The employee or their spouse owns the residential accommodation.
• The employee doesn’t incur expenditure for the occupied accommodation.
• Now that the meaning and the implications of the house rent allowance are clear. Let’s understand its eligibility.

Who is eligible for HRA benefits?

An employee will be eligible for HRA benefits if they satisfy any of the following criteria:

• A person serving under the Union Government shall be entitled to draw their House Rent Allowance at the rate specified by the Government.
• A person serving under the State Government shall be entitled to draw it at the rates specified by the State Government.
• A salaried individual who resides in rented accommodation and pays rent.

Next, let’s understand the maximum benefit limit on HRA.

What is the maximum limit for HRA?

The maximum HRA limit depends on factors such as inflation, employment type, job position, geographic locations, and many others. However, HRA can be at most 50% of the basic salary allotted to the employee.

Now, let’s know about the documents needed to claim HRA.

What documents are required to claim HRA benefits?

An employee needs the following list of documents to claim their HRA benefits:

• Valid rental agreement: An employee needs to possess a valid rental agreement with the landlord, compliant with income tax laws.
• Rent receipts: Individuals must also show their receipts as evidence to claim benefits and reduce TDS on salary.
• Pay rent via banking channels: Rent paid via banking channels helps keep a track record of the transactions made and serves as proof.
• PAN of the landlord: For rent payments exceeding 1 lakh a year, giving the PAN of the landlord is essential.

Now, let’s look at how HRA exemption can be calculated.

How is the HRA exemption calculated?

According to Section 10(13A) and Rule 2A, the lowest of the following can be claimed as an HRA exemption:

1. Actual HRA received
2. An amount equal to 50% of the salary (when the house is situated in a metro city) or 40% of the salary (when the house is located in a non-metro city)
3. Excess of rent paid, (Actual rent paid – 10% of basic salary)

It’s also essential to note that Salary = Basic + DA (if it’s part of retirement benefit) + Commission as a fixed turnover percentage.

Let’s explain this with an illustration.

Mr. Ajay, a resident of Pune, received Rs. 48,000 as a basic salary during the previous year 2022-23. Additionally, he receives Rs. 4,800 as dearness allowance, 7% commission on sales made by him (sales made during the period is Rs. 86,000) and Rs. 6,000 as house rent allowance. He, however, pays Rs. 5,800 as house rent. Determine the HRA exemption.

Let’s compute it

Now that the formula is clear let’s simplify this entire computation.

Frequently Asked Questions (FAQs)

1. Is HRA taxable?

Yes, the HRA is taxable under the Income Tax Act if it exceeds the limits specified under the exemption conditions.

2. Can self-employed individuals or freelancers claim HRA?

No, self-employed individuals or freelancers cannot claim HRA as it is a benefit employers provide to their employees.

3. How does the location of rented accommodation affect HRA calculations?

Higher rental rates in metro cities and results in higher exemptions than non-metro accommodations. So, yes, location does impact the HRA calculations.

4. Can employees living in their house claim HRA?

No, employees living in their accommodation cannot claim HRA as they do not incur any additional rental expenses.