HRA stands for House Rent Allowance, it is an allowance that almost every salaried employee receives as part of there salary package from there employer to meet the cost of rent that they pay for their home. In other words, HRA is a compulsory part of salary of an individual which every salaried person receives irrespective of the type of property he resides in. Which means, if your employer chooses to offer HRA then you will get this as part of your salary whether you stay in a rented house or reside in your own house.
As being a taxable part of salary, HRA gets special treatment in income tax law and is exempt from income tax to a certain extent. Now you must want to know ‘How much income tax exemption can you claim on your HRA?’
As per the income tax law, least of following three will be exempted
- Actual amount of HRA received from your employer as part of your salary
- Actual house rent paid by you minus 10% of your basic salary (this includes basic + dearness allowance, if any)
- 50% of your basic salary (if you reside in a rented house in metro city) or 40% of your basic salary (if you reside in a rented house in non-metro city)
Lets take an example to have a clear understanding of all the three scenario’s.
For Example, Your Basic Salary is Rs. 25,000; Dearness Allowance (DA) is Rs. 7,000; and House Rent Allowance (HRA) is Rs. 11,000;
You live in a rented house for which you pay Rs 12000 per month.
CASE I – Actual amount of HRA received from your employer as part of your salary
In this case you can claim exemption for Rs. 11,000, as this is the amount of HRA you receive.
CASE II – Actual house rent paid by you minus 10% of your basic salary (this includes basic + dearness allowance, if any)
In this case you can claim exemption of Rs 8800 [ Rs. 12,000 – 10% of (Rs. 25000 + Rs. 7000) ]
CASE III – 50% of your basic salary (if you reside in a rented house in metro city) or 40% of your basic salary (if you reside in a rented house in non-metro city)
In this case you can claim exemption of Rs. 12,500 (50% of Rs. 25,000 since this is a case of metro city).
So as per income tax law, least of the above three can be claimed for exemption which is Rs. 8800 ( In Case II). Therefore, the amount of HRA exempt from tax is Rs. 8800 per month. And the leftover amount of HRA i.e Rs 2200 (11,000 – 8800) would be added to your income and would be subject to income tax.
Can You Claim HRA Exemption?
Not everyone receiving HRA as part of their salary can claim for exemption under income tax act. There are few conditions that needs to be met for claiming IT benefit on HRA. Lets have a look, what are those conditions and are you eligible to ask for deduction for the rent paid by you:
You can claim HRA exemption towards the rent paid by you, if:
- You reside in a rented house
- You pay rent for the property you reside in
- You receive HRA as part of your salary
- You do not own the property for which you are paying rent
Other Conditions :-
- You are living in your parent’s house, and you pay regular rent and receives proof of payment in the form of rent receipt.
- You have your own house in the same city but you lives in a rented house near your work place.
- You and your parents have house in the same building, and you reside with your parents and pays then monthly rent while rented out your own house on rent.
- You and your parents have house in the same locality, and you stays with your parents and pays them monthly rent while your family stays in the other house.
Note : You can not claim rent paid to your spouse and only one of the spouses can claim HRA exemption – not both.
What All Documents Required To Claim HRA Exemption Under Income Tax Law?
You need not require any document of proof if your HRA claim is upto Rs 3000 per month. If the amount exceeds this limit then in that case you will be require to produce following documents as proof of payment.
- Rent receipts
- Rent receipt format for HRA tax exemption : A one rupee revenue stamp affixed on a complete filled in receipt with complete details of rented house and landlord like address of rented house, landlord name, amount of rent etc. with the signature of landlord receiving the rent.
- Rental agreement