HRA in Salary: Understand HRA Exemption in Income Tax


House rent allowance, or HRA, is a benefit received by many salaried employees. Did you know if you rent out your property, you can get a tax exemption via an HRA? You may be excluded from paying taxes on HRA contributions if you meet Section 80GG requirements.

Here, we will learn what an HRA is and how to calculate it. We will also understand how you can get an HRA exemption on your income tax.

What is House Rent Allowance?

Employers often provide a housing allowance for those staying in rented accommodation. You may thus use this exemption whether you are self-employed or employed somewhere that does not provide an HRA. However, your house rent allowance is tax-free if you are a lessee.

The tax benefits associated with the HRA exemption provision cannot be used by people who get HRA from their employer and also possess a primary residence.

How to Calculate Your House Rent Allowance?

Here is how to calculate your house rent allowance:

  • If you live in a tier 1 city, your HRA will equal half of your monthly salary.
  • The HRA should be between 40% and 50% in case you don’t receive any commissions or dearness allowance. 

Income Tax and HRA Salary

Your HRA pay may be calculated using the following factors:

  • Your net monthly rent payment minus 10% of your regular paycheck.
  • The money you received as an HRA.
  • You will get 50% of your regular salary (for a metropolitan area).
  • The lowest total of these three is the HRA you may write off. 

HRA Assessment Calculation

HRA is a deduction from taxpayers’ gross income if they pay rent. Online salary HRA calculators are available for you to use to determine your HRA refund.

The HRA refund might also be calculated manually. Use the HRA calculator on the Income Tax India website. For example, if an employee has annual rental expenses above ₹10,00,000, the landlord’s PAN number must be included on their tax return.

An employee can claim rent benefits in line with Section 80GG or the HRA exemption section. This is possible if they are paying rent costs but don’t get HRA as part of their compensation or pay rent without any income.

Considerations for HRA Deductions

The following factors should be considered for HRA deductions:

  • If you file jointly and pay your spouse’s rent, you cannot take advantage of the HRA exemption.
  • You may still benefit from the tax-free HRA status if you have a mortgage.
  • If you pay your rent to your parents and have a receipt, you may apply for a house rent allowance.
  • For tenants with an annual income above Rs.11,00,000, the PAN number of the tenant’s landlord is required.
  • In the case of a non-resident Indian landlord, 30% of the rent must be withheld as TDS (Tax Deducted at Source). 

Local Housing Allowance and Housing Rent Subsidy

Employees in tier-1 or metro regions may be eligible for a City Compensatory Allowance (CCA) from their employer. Workers at Tier-2 locations may be eligible for CCA under certain conditions. It’s not only based on a person’s starting wage but also on their position and pay scale. In other words, HRA is different in every city. An employee in Mumbai, for instance, would get more pay than their counterpart in Delhi.

A City Compensatory Allowance (CCA) in addition to their House Rent Allowance (HRA), helps pay the higher cost of living associated with rented accommodation. Regarding taxes, CCA benefits are completely tax-free, whereas HRA recipients may deduct up to Rs1,000,000 from their income.

Proof of Payment for HRA Exemption

You must show your rent receipt to the tax office to claim a break. You should save a copy of the lease and the license agreement, as well as any utility bills, letters to the cooperative organization, etc., that pertain to the tenancy. A house rent allowance is a tax deduction for money spent on housing that is exempt from taxation under Section 80GG of the Income Tax Act.

Suppose a worker has previously claimed a deduction for HRA contributions under another section of the Income Tax Act. In that case, the HRA exemption will not apply. Those who do not qualify for the house rent allowance but are still eligible for the HRA may deduct mortgage interest and other related costs under Section 80GG.

Constraints Expanded Upon Linked to Article 80 GG

Housing unit exemptions are only available to HUFs and individuals. Rent costs are deductible for self-employed and wage earners who don’t have any tax breaks available under Section 10. (13A).

The HUF of which the worker is a member does not own the residence where the worker is engaged in business, nor does the HUF own any of the worker’s dependents. Section 80 GG deductions did not also claim any other rental homes they use as their primary residence. All self-declarations for deductions under Section 80 GG must be filed using Form 10-BA. The applicant must provide evidence in the form showing they are eligible.

Summing Up

You may keep claiming HRA only if you opt for the old tax scheme. Remember that under the new tax legislation, you won’t be able to take advantage of any HRA exemption, except for small NPS payments (up to Rs. 50,000) and mortgage interest (up to Rs. 2 lakhs). As a result, if you are currently renting and have a house loan, you should not be shy about taking advantage of the double tax benefits.

To learn more about HRA and HRA exemption, you can read similar blogs on the Piramal Finance website.