All you wanted to know about House Rent Allowance (HRA)

House Rent Allowance (HRA) is generally paid as component of salary package. This allowance is given by an employer to an employee to meet the cost of renting an accommodation. Section 10(13A) of the Income Tax Act provides for exemption of HRA based on certain rules. In order to claim HRA exemption, the following basic conditions should be met:

1. You should be staying in a rented accommodation.
2. The house should not be owned by you or your wife.
3. You should be paying the rent.

What is the exemption amount?

Minimum of the following three is exempt:
1. Actual HRA received
2. Rent paid minus 10% of Salary
3. 50% of salary if you live in Mumbai, Delhi, Kolkata or Chennai, otherwise 40% of Salary

Salary means Basic Salary + Dearness Allowance + Commission based on a fixed percentage of turnover achieved by employee. Most of the private sector companies don’t have the last two components in the salary package.

Simple example:

Basic Salary: Rs 30,000 per month, i.e. Rs 360,000 for the year
HRA: Rs 10,000 per month, i.e. Rs 120,000 for the year
Rent paid: Rs 8,000 per month, i.e. Rs 96,000 for the year (House in Chennai)

HRA exemption:

HRA received: Rs 120,000
Exempt: Minimum of following,
1. Actual HRA: Rs 120,000
2. Rent less 10% of Salary: Rs 96,000 – (10% of 360,000): Rs 60,000
3. 50% of Salary: Rs 180,000

Thus Rs 60,000 HRA is exempt and balance Rs 60,000 HRA is taxable.
Thus out of Rs 480,000 Salary package; Rs 420,000 is taxable and Rs 60,000 is exempt (For the time being let’s ignore all other exemptions under Income Tax Act).

SMI Tax Planning Tips:

1. Negotiate Salary Package

When negotiating Salary package try to make HRA component 50% of Basic Salary. For example your employer is willing to pay Rs 600,000 Salary for the year. You can structure it as Rs 500,000 Basic + Rs 100,000 HRA OR Rs 400,000 Basic + Rs 200,000 HRA. It would be better to go for the second option since maximum HRA exemption is limited to 50% of Basic. HRA of more than 50% of Basic and you will get stuck in Rule 3, i.e. 50% of Salary.

Disclaimer: This would at times be not in your hand and many companies would have their own criteria about how much HRA would be. Next tip is more practical

2. “Ideal Rent”

“Decide” on the “Ideal Rent” amount for the “Rent Receipt” you need to submit to your employer. Follow the simple formula:

Ideal Rent = HRA + 10% of Salary

Thus Rent for example above would be Rs 10,000 + (10% of 30,000) = Rs 13,000 per month, i.e. Rs 156,000 per annum

Quick Re-calculation of our example:

HRA received: Rs 120,000
Exempt: Minimum of following,
1. Actual HRA: Rs 120,000
2. Rent less 10% of Salary: Rs 156,000 – (10% of 360,000): Rs 120,000
3. 50% of Salary: Rs 180,000

Thus entire Rs 120,000 HRA is exempt.
Thus out of Rs 480,000 Salary package; Rs 360,000 is taxable and Rs 120,000 is exempt. That’s a neat saving of tax on Rs 60,000 compared to first scenario!!

Note: If the tip 1 is also implemented, Salary Package of Rs 480,000 is negotiated as Rs 320,000 as Basic Salary and Rs 160,000 as HRA.

“Ideal Annual Rent” is Rs 160,000 + (10% of 320,000) = Rs 192,000. Exemption as under:

HRA received: Rs 160,000
Exempt: Minimum of following,
1. Actual HRA: Rs 160,000
2. Rent less 10% of Salary: Rs 192,000 – (10% of 320,000): Rs 160,000
3. 50% of Salary: Rs 160,000

Thus entire Rs 160,000 HRA is exempt.
Thus out of Rs 480,000 Salary package; Rs 320,000 is taxable and Rs 160,000 is exempt. That’s a neat saving of tax on Rs 100,000 compared to first scenario!!

3. Staying with your Parents?

Paying rent to family to claim exemption. It would be advisable for the landlord, in this case your parent, to declare this income in his/ her personal Income Tax return. This will prevent any litigation in the future. However paying rent to spouse is not advisable.

4. Taken a Housing Loan?

Can you claim both deduction for Interest on Home Loan u/s 24(1) and HRA u/s 10(13A)?

YES and NO.

If the own property and rented property are in different cities, both exemption can be claimed. For example you have property in Kolkata where your parents reside and you work in Mumbai and stay in rented apartment. You can claim both deduction for Interest on Home Loan and HRA. Note the owned property should be self-occupied and should not have been rented out. In that case deduction for Interest on Home Loan is not available.

If the own property and rented property are in same cities, both exemption cannot normally be claimed. However you can still claim both exemptions if you can proof that the owned property is far off from your work place and you stay in rented house near to your office. For example Loan is taken for house in Borivali and you stay in rented house in Colaba and your office is in Fort area in Mumbai, you can claim both exemptions. Again note the owned property should be self-occupied and should not have been rented out. In that case deduction for Interest on Home Loan is not available.