House Rent Allowance or HRA is a component of most employees’ pay packages. Despite being a portion of your compensation, HRA is not entirely taxed, unlike basic wage. A portion of HRA is free from taxation under Income Tax Act Section 10 (13A), subject to specific circumstances. The amount of house rent allowance tax exemption is deducted from overall income before calculating total taxable income. This allows an employee to cut money on taxes.
This article will go over the details of savings taxes on house rent allowance.
What is the house rent allowance?
People frequently need to relocate to another city to find employment. In such instances, people may have to pay rent for housing. Employees are frequently compensated for this expense by receiving an HRA or house rent allowance which is added to their base wage. This is frequently included in the compensation structure. House rent allowance amount, on the other hand, is income tax-free and therefore, can be a terrific method to lower your overall taxable income.
Who is eligible for the tax exemption on HRA?
Salaried individuals who receive HRA components as a section of their monthly salary and live in any rented accommodation can get tax exemption on HRA if they opt for the old tax regime. This tax benefit is not available for individuals who are self-employed.
What is the amount of tax exemption on HRA?
The amount you can get as tax exemption on HRA will be the lowest amount of the following values:
- The amount received as HRA in your salary
- 50% of your salary (if you are living in any metro city) or 40% of your salary (if you are living in any non-metro city)
- The amount paid as rent over 10% of your yearly salary amount
Here, the term ‘salary’ indicates your basic salary. In case, DA or commission from sales is applicable, they need to be added when calculating the tax exemption amount on the house rent allowance. However, you need to make sure the DA or dearness allowance amount forms a component of your retirement benefits. Also, this tax deduction is provided to the individual only during the period hey when they pay rent for any rented property for which they can provide rent receipts. Online rent receipt generators can provide rent receipts to homeowners.
What are the documents required to claim tax exemption on HRA?
These HRA tax exemptions are only available upon the production of valid house rent receipts or any valid lease agreement with the dwelling owner. To receive the tax deduction, the employee must declare the PAN number of the ‘homeowner’ to his or her company along with the house rent receipts if the rent amount paid exceeds the limit of Rs. 1 lakh per year. You can easily generate house rent receipts using online rent receipt generators.
Renting from family members
The individual requesting the tax deduction should not own the rental property. Therefore, if you live with your parents as well as pay them to rent money, you can seek a tax deduction under the house rent allowance. However, you will need rent receipts. You can generate receipts from online rent receipt generators. You cannot, nevertheless, contribute your spouse’s rent. Because, from the standpoint of the partnership, you are expected to accept the accommodation jointly. As a result, the income tax agency may investigate these transactions.
If you’re renting a property from your parents, ensure you have documentation proving that monetary transactions pertaining to your rental take place between your parents and you. So, maintain track of your banking activities as well as rent receipts since the tax agency may reject your claims if they aren’t satisfied that the transactions are genuine. Earlier, a salaried taxpayer’s house rent allowance tax claim was denied by the income tax appeal court of Mumbai because the demand did not look legitimate to the tax officers.
Renting a property but not receiving any HRA
There may be certain employees whose wage structure does not include a house rent allowance component. A non-salaried person may be paying rent as well. Income Tax Act Section 80 (GG) provides relief for them. Individuals who pay rent for any furnished or unfurnished housing can seek tax deduction for the rental payments under Income Tax Act Section 80(GG) by submitting Form 10B if they are not paid house rent allowance as a component of their wage.
The bottom line
When claiming an income tax deduction, keep in mind that the person, husband or wife, minor kid, or any member of a Hindu Undivided Family or HUF, should not own any property. Furthermore, no tax deduction is permitted if the person owns any property which is residential in any other location and generates rent from the same.