Attention Employees! Receiving HRA? Know Your Taxability Before Filing ITR

Every employee is in a rush to file Income Tax Returns ( ITR ), it is important to know about various exemptions. House Rent Allowance ( HRA ) is a key component of a salary package provided by employers to employees to meet the cost of renting a home. The HRA received by an employee is partially or fully exempt from income tax under Section 10(13A) of the Income Tax Act, subject to certain conditions.

Eligibility Criteria for HRA Exemption

To avail, of the HRA exemption, the employee must live in a rented house and the employee must receive HRA as part of their salary. The rent paid by the employee must be more than 10% of their salary. It is important to note that if the employee owns a house and stays there, an HRA exemption cannot be claimed. Furthermore, if the employee shares accommodation and pays a part of the rent, they can claim HRA exemption on their share of the rent.

Calculating HRA Exemption

The exemption on HRA is calculated on the minimum of the three amounts as follows;

1. Actual HRA received
2. 50% of salary (basic salary + dearness allowance, if any) if the employee resides in a metro city (Mumbai, Delhi, Kolkata, or Chennai) or 40% of salary if the employee resides in a non-metro city.
3. Actual rent paid minus 10% of salary.

Example Calculation:

Assume an employee residing in a non-metro city has the following details:

Basic salary: ₹30,000 per month

HRA received: ₹15,000 per month

Rent paid: ₹12,000 per month

Dearness allowance (DA): ₹5,000 per month

Annual values:

Basic salary: ₹30,000 × 12 = ₹3,60,000

HRA received: ₹15,000 × 12 = ₹1,80,000                                                                        

Rent paid: ₹12,000 × 12 = ₹1,44,000

DA: ₹5,000 × 12 = ₹60,000

Salary (Basic + DA): ₹3,60,000 + ₹60,000 = ₹4,20,000

Calculating the exemption:

Actual HRA received: ₹1,80,000

40% of salary: 40% of ₹4,20,000 = ₹1,68,000

Actual rent paid minus 10% of salary: ₹1,44,000 – 10% of ₹4,20,000 = ₹1,44,000 – ₹42,000 = ₹1,02,000

The least of the above three amounts is ₹1,02,000. Thus, the HRA exemption is ₹1,02,000.

Key Documents Required

• Rent Receipts: Employees must submit rent receipts to their employer to claim HRA exemption. If the rent exceeds ₹1 lakh per annum.
•  Landlord’s PAN: If the annual rent exceeds ₹1 lakh, you must provide the PAN of the landlord. If the landlord does not have a PAN, you need to submit a declaration.
• Form 16: Provided by your employer, it contains details of your salary and HRA received.
• Rental Agreement: Maintaining a rental agreement with the landlord is advisable.

Claiming HRA While Filing ITR

If HRA exemption is not accounted for by the employer in Form 16, the employee can claim it while filing the Income Tax Return (ITR).Proper documentation (rent receipts, rental agreement) should be maintained to substantiate the claim in case of scrutiny.

• Login to the Income Tax e-Filing Portal: Access your account using your credentials.
• Select the Appropriate ITR Form: Typically, ITR-1 or ITR-2 for salaried individuals.
• Enter Salary Details: In the ‘Income Details’ section, enter your gross salary, HRA received, and exempt portion of HRA.
• Provide HRA Details: Fill in the details of rent paid and calculate the exempt HRA amount.
• Submit Proof: Although proofs are not submitted with the ITR, retain all documents for verification in case of an audit or query from the Income Tax Department.

Common Mistakes to Avoid While Claiming Exemption

• Incorrect Calculation: Ensure accurate calculation of exempt HRA.
• Missing Documentation: Maintain and retain all necessary documents and proofs.
• Non-disclosure of Rental Income: If your landlord is not disclosing the rental income, it may lead to issues.
• Claiming Without Actual Payment: Only claim HRA if you are actually paying rent.

HRA for Self-Employed Individuals

Self-employed individuals cannot claim HRA exemption under Section 10(13A). However, they can claim rent paid as a deduction under Section 80GG, subject to certain conditions and limits.

HRA provides a significant tax benefit for salaried individuals living in rented accommodation. Proper calculation and documentation are essential to maximize the exemption. Understanding the interplay between HRA and other deductions, such as home loan benefits, can further optimize tax savings. Claiming HRA exemption can significantly reduce your taxable income if you are eligible.

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