Friends,
The seasonal mad frenzy surfaces from time to time. Most often towards the end of every financial year or in the beginning of the year, when we think of tax planning, certain doubts and queries about the various tax components play havoc on our minds. To put some of those queries to rest, here, we take up for discussion the tax exemption you can claim from your house rent allowance, which is part of the mix.
Here some queries that lend clarity to the HRA aspect.
1. How is HRA accounted for in the case of a salaried individual and a self employed professional?
HRA (House Rent Allowance) is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. On the other hand, self employed professionals cannot be considered for HRA exemption under this act, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.
2. What are the dependent factors in calculating HRA for the salaried individual?
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, pay hike or shift in residence etc. then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.
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. This holds true especially when you work at a metro and reside at a non-metro. In this case, your city of residence only will be considered for calculating your HRA.
3. Can I pay rent to my parents or spouse to avail HRA benefits?
You can pay rent to your parents, however, they need to account for the same under’Income from House property’ and will be entitled to pay tax for the same.
On the other hand, you cannot pay rent to your spouse. 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.
4. Do I need to submit any proof for my HRA claim?
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.
5. How do I calculate my HRA?
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 taxable HRA amount for Sunitha per month will be Rs. 25,000 – 16,000 (available HRA deduction) = Rs. 9,000.
HRA Calculator Excel available here
HRA Exemption calculation Must be done yearly,monthly or otherwise?
6. Can I simultaneously avail tax benefits on my home loan and HRA?
The tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other. As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under income from other sources.
The seasonal mad frenzy surfaces from time to time. Most often towards the end of every financial year or in the beginning of the year, when we think of tax planning, certain doubts and queries about the various tax components play havoc on our minds. To put some of those queries to rest, here, we take up for discussion the tax exemption you can claim from your house rent allowance, which is part of the mix.
Here some queries that lend clarity to the HRA aspect.
1. How is HRA accounted for in the case of a salaried individual and a self employed professional?
HRA (House Rent Allowance) is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. On the other hand, self employed professionals cannot be considered for HRA exemption under this act, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.
2. What are the dependent factors in calculating HRA for the salaried individual?
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, pay hike or shift in residence etc. then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.
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. This holds true especially when you work at a metro and reside at a non-metro. In this case, your city of residence only will be considered for calculating your HRA.
3. Can I pay rent to my parents or spouse to avail HRA benefits?
You can pay rent to your parents, however, they need to account for the same under’Income from House property’ and will be entitled to pay tax for the same.
On the other hand, you cannot pay rent to your spouse. 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.
4. Do I need to submit any proof for my HRA claim?
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.
5. How do I calculate my HRA?
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 taxable HRA amount for Sunitha per month will be Rs. 25,000 – 16,000 (available HRA deduction) = Rs. 9,000.
HRA Calculator Excel available here
HRA Exemption calculation Must be done yearly,monthly or otherwise?
6. Can I simultaneously avail tax benefits on my home loan and HRA?
The tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other. As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under income from other sources.
