The tax season and all the frantic hurry associated with it is due to start in a month or so. There are many tax components you need to be clear about and also figure out how to plan your investments to gain maximum returns as well as maximum tax benefits. One such tax component is the tax benefit you can claim from your house rent allowance.
HRA (house rent allowance) is provided to salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules.
The four components of HRA calculation
When you are calculating HRA for tax exemption you take into consideration four aspects which includes salary, HRA received, the actual rent paid and where you reside, i.e. if it is a metro or non-metro. If these aspects remain constant through the year, then tax exemption is calculated as a whole annually, if this is subject to change, as in a rent hike or shift in residence etc. then it is calculated on a monthly basis.
The place of residence is significant in HRA calculation as for a metro the tax exemption for HRA is 50% of the basic salary while for non-metros it is 40% of the basic salary.
How HRA exemption is calculated
To figure out how much HRA exemption you are eligible for, consider these three values which includes a.The actual rent allowance the employer provides you as part of your salary, b. the actual rent you pay for your house from which 10% of your basic pay is deducted, c. 50% of your basic salary when you reside in a metro or 40% if you reside in a non-metro.
The least value of these three values is allowed as tax exemption on your HRA. You can discuss restructuring your pay structure with your employer in order to avail the most of your HRA tax benefit.
Here is a sample illustration for your understanding:
Sunitha earns a basic salary of Rs 40,000 per month and rents an apartment in Delhi for Rs 20,000 per month (hence eligible for a 50% of the basic pay for HRA exemption). The actual HRA she receives is Rs 25,000.
These values are considered to find out her HRA tax exemption:
a. Actual HRA received, i.e. Rs 25,000,
b. 50% of the basic salary, i.e. Rs 20,000, and
c. Excess of rent paid over 10% of salary, i.e. Rs 20,000 - Rs 4,000 = Rs 16,000
The value considered for her actual HRA exemption will be the least value of the above figures. Hence, the net taxable HRA for Sunitha will be Rs. 25,000 - 16,000 (available HRA deduction) = Rs. 9,000.
HRA exemption for the self employed
Self employed professionals are eligible for tax deductions under section 80GG of Income Tax Act, 1961. This provision in the IT Act enables a person who is paying rent but does not receive HRA allowance to claim tax exemption for his rent expenses.
Who can you pay rent to?
It is not essential that you should pay rent only to a landlord to avail your HRA benefits. You can pay rent to your parents as well to claim tax benefits. However, they need to account for the same in their tax sheet and will be entitled to pay tax for the same.
Remember you cannot claim HRA exemption on the basis of paying rent to your spouse. Tax laws do not permit this in view of the relationship. When you take up residence together, you are expected to do so and hence such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny, so steer clear of these.
Tax proof for HRA exemption
You need to submit proof of rent paid through rent receipts, for which only two need to be submitted, one for the beginning of the year and one towards the end of the financial year. It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it etc.