How to Claim HRA Exemption when Filing your ITR?
How to Claim HRA Exemption when Filing your ITR?
House Rent Allowance (HRA) refers to the allowance paid by the employer to an employee as part of the salary for housing expenses. Understanding the HRA and how it can be exempted from taxable income is essential for taxpayers. Salaried individuals living in a rented house can claim HRA exemption under Section 10 (13A) of the Income Tax Act. One can claim the lowest amount among HRA received, rent paid minus 10% of salary, or a fixed percentage based on your city. This article gives complete information regarding the HRA exemption, eligibility criteria, documents required, how to claim during the ITR filing, and more.
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Get Started!What is House Rent Allowance (HRA)?
House Rent Allowance (HRA) is a portion of your salary paid by your employer to help cover the cost of renting a place to live. It’s a tax-saving benefit, but the amount exempt from taxes depends on factors like your base salary, the HRA amount itself, and whether you live in a metro city (where you can exempt up to 50% of your base salary) or a non-metro city (where it’s 40%). There are also requirements like having rent receipts and potentially your landlord’s PAN card.
Eligibility Criteria to Claim HRA Exemption
To claim an HRA exemption under the Income Tax Act, you should meet the following conditions:
- Salaried Employee: The HRA benefit is exclusively available to salaried individuals. You won’t be eligible to claim this exemption if you’re self-employed.
- HRA as Part of Salary Package: To claim the HRA exemption, the house rent allowance must be part of your employer’s CTC (Cost to Company) or salary structure.
- Residing in Rented Accommodation: This exemption applies only if you live in a rented house or apartment and pay rent. You cannot claim HRA if you live on your property.
- Proof of Rent Payment: To claim HRA exemption, inform your employer about the rent you’ve paid. Submitting original rent receipts serves as proof of your rental expenses.
- PAN for Landlords with High Rent: If your annual rent exceeds Rs. 1,00,000, you must disclose your landlord’s Permanent Account Number (PAN) to your employer.
- HRA Exemption and Tax Regime: It’s important to note that the HRA exemption is only available if you opt for the old tax regime while filing your ITR.
Documents required to Claim HRA exemption?
The following documents are necessary to claim HRA exemption under the Income Tax Act,
- Rent Receipts: These receipts should be duly stamped and mention details like the date, your name, the landlord’s name, the rent amount, the address of the property, and the duration of the stay.
- Rental Agreement: A copy of your valid rental agreement for the current financial year.
- Landlord’s PAN Card: This is only mandatory if your total rent paid in a financial year exceeds Rs. 1,00,000.
- Declaration of HRA: Your employer may require a declaration form stating the amount of HRA received and details of your rental expenses. This helps them calculate the eligible HRA exemption for your tax deductions.
- Utility Bills (Optional): While not always mandatory, providing utility bills like electricity, water, or gas bills can further substantiate your claim by demonstrating your residence at the rented accommodation.
You’ll typically submit these documents to your employer while claiming HRA during tax filing. Based on these proofs, they will reflect the HRA exemption in your Form 16. Even if you don’t claim an HRA exemption from your employer, you can still claim it while filing your Income Tax Return (ITR) by submitting these documents yourself.
How Much HRA Exemption Amount can be claimed?
The maximum HRA exemption you can claim under the Income Tax Act is the lowest of the following three amounts:
- Actual HRA Received: This refers to the specific amount of House Rent Allowance mentioned in your salary structure.
- HRA Limit Based on City Type: The limit varies depending on whether you live in a metro city or a non-metro city:
- Metro Cities (Mumbai, Delhi, Chennai, Kolkata, Pune): Here, the maximum HRA exemption is capped at 50% of your basic salary + Dearness Allowance (DA).
- All Other Cities: The limit is set at a lower threshold of 10% of your basic salary for non-metro cities.
- Actual Rent Paid Minus 10% of Basic Salary: This calculation considers your actual rental expenses throughout the year. You subtract 10% of your basic salary from the total rent paid to arrive at this amount.
The calculation can be done annually if all the factors remain constant throughout the financial year. If your salary structure or rent amount has changed, then calculations must be made every month.
How is the HRA exemption amount calculated?
As discussed in the previous section, HRA exemption is calculated in three modes. The lowest will be chosen as an exemption amount and deducted from the taxable income, reducing your tax liability. Here’s an example that captures how the HRA exemption calculation works:
Let’s take Mr. Raj as an example:
- Monthly Basic Salary: Rs. 40,000
- HRA Received: Rs. 12,000
- Rent Paid: Rs. 18,000 (per month)
- Living in: Non-Metro City
Here’s how to calculate his HRA exemption for FY 2023-2024 (assuming the old tax regime)
- Actual HRA Received: Rs. 12,000 (per month) * 12 months = Rs. 1,44,000
- 40% of Salary (Basic + DA): 40% * (Rs. 40,000 + DA) * 12 months = Let’s assume Dearness Allowance (DA) is Rs. 5,000, so 40% * (40,000 + 5,000) * 12 = Rs. 1,92,000
- Excess Rent Paid over 10% of Salary: Rs. 18,000 * 12 months = Rs. 2,16,000 (yearly rent)
- 10% of Salary = Rs. 48,000
- Excess Rent = Rs. 2,16,000 – Rs. 48,000 = Rs. 1,68,000
Now, we compare the three amounts to find the least value:
- Actual HRA Received: Rs. 1,44,000
- 40% of Salary: Rs. 1,92,000
- Excess Rent Paid: Rs. 1,68,000
In this case, the least value is Rs. 1,44,000 (Actual HRA Received). Therefore, Mr Raj’s HRA exemption under Section 10(13A) will be Rs. 1,44,000.
How to claim HRA exemption during the time of filing ITR returns?
As mentioned, to claim an HRA exemption, you must submit an income declaration form (Form 12BB) to your employer. If you forgot or cannot furnish the required details in Form 12BB, the other way is to claim during the ITR filing. Here are the basic steps to claim an HRA exemption while filing an ITR:
- Calculate the eligible amount for an HRA exemption as explained above, i.e., identify the lowest of all the three calculations.
- Calculate your taxable income by subtracting the HRA exemptions and deductions from the gross salary.
- File your ITR return by using the appropriate ITR form.
- Fill out the HRA details in the chosen ITR return form. You need to enter the actual HRA received from your employee, the lowest of all three amounts, and the HRA exemption amount.
- Attach the necessary documents, such as rent receipts, rental agreements, and others that emphasize your rental status.
Also read: Easy tax saving techniques for Salaried employees
Can I claim both deductions for both HRA allowance and Home loan interest?
Yes, you can claim deductions for HRA allowance and home loan interest in India on fulfilling the specific conditions under section 10(13A). You can avail of this benefit if you pay rent and have a home loan for a property in your name (or jointly with your spouse). However, the HRA exemption applies only to your rented accommodation, not the house you own with the home loan. Ensure you have documents like rent agreements, receipts, and home loan interest statements to claim deductions during tax filing.
How to prevent the rejection of HRA exemption while filing an ITR?
To ensure a smooth HRA tax exemption claim during ITR filing, keep these key points in mind:
- Valid Rent Agreement: Ensure you have a written agreement with your landlord specifying the rent amount, TDS applicability (if rent exceeds Rs. 50,000 per month), and details of both parties. Include PAN and Aadhaar for better record keeping (optional but recommended).
- Rent Receipts: Collect receipts for all rent payments made during the financial year, even for electronic payments. These serve as proof of actual rent paid.
- Pay Rent Electronically: Opt for bank transfers, UPI, etc., for rent payments. Bank statements provide a clear record for the tax department. According to experts, the rent receipts of cash payments above Rs. 2 lakh can attract penalties under Section 271DA.
- Landlord’s PAN (if applicable): If claiming HRA exemption from your employer and your rent exceeds Rs. 1 lakh annually, provide your landlord’s PAN. Keep a copy for your records in case the department inquires.
- Paying Rent to Family: While legal, paying rent to family members requires maintaining proper documentation (agreement, receipts) to avoid rejecting your HRA claim. Ensure your family members include the rent received as income in their tax return (if applicable).
What to do if one doesn’t receive an HRA?
If you don’t receive HRA, you can still claim a deduction for rent paid under Section 80GG of the Income Tax Act. However, there are eligibility conditions:
- Salaried or Self-Employed: You must be either a salaried individual or self-employed.
- No HRA Received: You cannot have received any HRA from your employer during the year.
- Rent Exceeds 10% of Income: Your rent should be more than 10% of your total income.
- No Owned Property in Same City: You or your family shouldn’t own a residential property in the city where you’re staying for work.
Conclusion
In conclusion, claiming an HRA exemption on your income tax can significantly reduce your tax burden. This article provides a comprehensive guide on HRA eligibility, exemption calculation, required documents, and the ITR filing process. Remember, proper documentation like rent agreements, receipts, and potentially your landlord’s PAN are crucial for a smooth HRA claim. Even if you don’t receive HRA, you might be eligible for a deduction under Section 80GG.
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