Salaried individuals, who live in rented houses, can claim the House Rent Allowance (HRA) to lower their taxes – partially or wholly.
The allowance is for expenses related to rented accommodation. If you don’t live in rented accommodation, this allowance is fully taxable.
Please note that the tax exemption of house rent allowance is not available in case you choose the New tax regime. from FY 2020-21 (AY 2021-22)
The deduction available is the least of the following amounts:
Yes, you may claim the HRA as it has no bearing on your home loan interest deduction. Both can be claimed.
If you have taken a house on rent and are making a payment in excess of Rs 1 lakh annually – remember to provide the landlord’s PAN. Else, you may lose out on the HRA exemption.
Landlords without a PAN must be willing to give you a declaration as per circular No. 8/2013 dated 10 October 2013. Tenants paying rent to NRI landlords must remember to deduct TDS of 30% before making the payment towards rent.
If you pay rent for any residential accommodation occupied by you but do not receive HRA from your employer, you can still claim the deduction under Section 80GG. Conditions that must be fulfilled to claim this deduction:
In case you own any residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. The other property would be deemed to be let out in order to claim the 80GG deduction.
Mr Anuj, employed in Delhi, has taken up an accommodation on rent for which he pays a monthly rent of Rs 15,000 during the Financial Year (FY) 2019-20. He receives a Basic Salary of Rs 25,000 monthly along with DA of Rs 2000, which forms a part of the salary. He also receives an HRA of Rs 1 lakh from his employer during the year.
Let us understand the HRA component that would be exempt from income tax during FY 2019-20. As per the given data, calculate the following:
Therefore, in the above example, the entire HRA received from the employer is exempt from income tax.
The least of the will be considered as the deduction under this section:
*Adjusted Total Income means Total Income Less long-term capital gain, short-term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U (except deduction under section 80GG).
Let’s understand this with an example.
Pooja works in an MNC in Bangalore. Though her company provides her with HRA, she lives with her parents in their house and not in rented accommodation.
How can she make use of this allowance?
Pooja can pay rent to her parents and claim the allowance provided. All she has to do is enter into a rental agreement with her parents and transfer money to them every month. This way Samiksha can make a nice gesture to her parents while saving on taxes. Also, it is important for Samiksha’s parents to report the rent she paid as income in their income tax returns. If their other income is below the basic exemption limit or if taxable at a lower tax slab, then they can save tax on the family income.
Dearness allowance is a component of salary towards adjustment for cost of living paid generally to government employees, public sector employees, and pensioners. Dearness allowance is calculated as a percentage of basic salary to cover the impact of inflation.
HRA, house rent allowance is a component of salary paid by big employers towards rent payment by the employee. HRA exemption is allowed least of the below :