HRA Exemption Rules: How to save income tax on house rent allowance under old tax regime

For most employees, House Rent Allowance (HRA) is a part of their salary structure. Although it is a part of your salary, HRA, unlike basic salary, is not fully taxable. Subject to certain conditions, a part of HRA is exempted under Section 10 (13A) of the Income-tax Act, 1961

Amount of HRA tax exemption is deductible from the total salary income before arriving at a gross taxable income. This helps an employee to save tax. But do keep in mind that the HRA received from your employer, is fully taxable if an employee is living in his own house or if he does not pay any rent

Do keep in mind that every financial year, a salaried individual has the option to either continue with the existing tax regime (along with deductions and tax exemptions) or opt for the new income tax regime sans tax deductions and exemptions (like HRA). Thus, if you opt for the new income tax regime in a financial year, then you will not be able to claim tax exemption on HRA.

Who can avail tax exemption on HRA?
This tax benefit is available only to the salaried individuals (opting for old tax regime) who have the HRA component as part of their salary structure and is staying in rented accommodation. Self-employed professionals cannot avail this deduction.

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How much of HRA is tax-exempt?
The tax-exemption for HRA is the minimum of:
i) Actual HRA received
ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and
iii) Excess of rent paid annually over 10% of annual salary

For calculation purpose, the salary considered is 'basic salary'. In case 'Dearness Allowance (DA)' (if it forms a part of retirement benefits) and 'commission received on the basis of sales turnover' is applicable, they too are added to compute the minimum HRA exemption available.

This tax benefit is available to the person only for the period in which the rented house is occupied.

Example of tax-exemption on HRA
Let's say an individual, with a monthly basic salary of Rs 15,000, receives HRA of Rs. 7,000 and pays Rs. 8,400 rent for accommodation in a metro city. The tax rate applicable to the individual is 20 per cent on his income under the old tax regime.

To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:
i) Actual HRA received = Rs. 84,000 (7000 x 12)
ii) 50% of salary (metro city) = Rs. 90,000 (50% of Rs .(15,000 x 12 = 1,80,000))
iii) Excess of rent paid annually over 10% of annual salary = Rs .82,800 (Rs .1,00,800* - (10% of Rs. 1,80,000))
*8400X12 = 100,800

It shows that of Rs 84,000 actually received as HRA, Rs .82,800 gets tax exemption and only the balance of Rs. 1,200 gets added to the employee's income, on which a tax of Rs 240 (20 per cent slab) gets payable.

Documents required to claim HRA tax exemption
HRA exemptions can be availed only on submission of rent receipts or the rent agreement with the house owner. It is mandatory for an employee to report the PAN of the 'landlord' to the employer if the rent paid is more than Rs 1,00,000 annually to avail the tax benefit.

Special cases
There could be special scenarios in claiming HRA tax benefit, such as:

1. Paying rent to family members
The rented premises must not be owned by the person claiming the tax exemption. So if you stay with your parents and pay rent to them then you can claim that for tax exemption under HRA. However, you cannot pay rent to your spouse. As, in the view of the relationship, you are supposed to take the accommodation together. Thus, these transactions can invite scrutiny from the income tax department.

Even if you are renting the house from your parents, make sure you have documentary evidence as proof that financial transactions regarding your tenancy take place between you and your parent. So keep a record of banking transactions and rent receipts because your claim can get rejected by the tax department if they are not convinced by the authenticity of the transactions. Previously, there has been an instance in which the HRA claim of a salaried taxpayer was rejected by the Mumbai income tax appellate tribunal because the claim for HRA did not appear genuine to the tax officials.

Also Read: For tax relief, you need proof of rent paid to kin

Also Read: 10 things to do so that HRA claim does not get rejected

2. Own a house, but staying in a different city
One can avail simultaneous benefit of deduction available for the home loan against 'interest paid' and 'principal repayment' and HRA in case your own home is rented out or you work in another city.

Individuals who don't get HRA but pay rent
There may be some employees who might not have an HRA component in their salary structure. Also, a non-salaried individual might be paying rent. For them, Section 80 (GG) of the Income-tax Act offers help.

An individual paying rent for a furnished/unfurnished accommodation can claim the deduction for the rent paid under Section 80(GG) of the I-T Act, provided he is not paid HRA as a part of his salary by furnishing Form 10B.

How much tax deduction available under section 80GG
The least of the following is available for exemption from tax under Section 80GG:
(i) Rent paid in excess of 10% of total income
(ii) 25% of the total income*
(iii) Rs.5,000 per month

*Under this section, the total income is calculated as gross total income minus long-term capital gains, the short-term capital where Securities Transaction Tax (STT) has been paid and deductions available under Sections 80C to 80U, except Section 80GG.

Conditions
While claiming a tax deduction, one must remember that the individual himself or his/her spouse, or minor child, or as a member of the Hindu Undivided Family (HUF) must not own any accommodation. Also, if the individual owns any residential property at any place and earns rent from it then no deduction is allowed.

One can avail the simultaneous benefit of deduction available for the home loan against 'interest paid' and 'principal repayment' and HRA in case your own home is rented out or you work in another city. However, the same is not available in case of Section 80GG.

(With inputs from Sunil Dhawan)