House Rent Allowance - HRA

What is House Rent Allowance?

House Rent Allowance (HRA) is one of important component of Salary package given to employee by their employer. Its allowance given by employer to its  employee to meet employee's expense towards renting an accommodation. 

Tax exemption under Income Tax Act for HRA is allowed to salaried persons who are occupying a rented accommodation. It is being regulated by 2A of Income Tax Rules, 1962 and Section 10(13A) of the Income Tax Act, 1961.

HRA can be exempted only in following conditions:

• The employee must not own the property in which he / she is residing.
• Employees must be paying rent for the accommodation.
• Such rent must be more than 10 per cent of his/her salary.

Note: Employee can not exempt Rent paid by him / her if HRA component is not their in his / her salary package. In case Self employed professionals can claim the benefits on house rent expenses under section 80GG.

How to Calculate HRA Tax emxemption?

Least of following three will be exempt from Income Tax:

• 50% of (Basic Salary + DA) in case of residing in Metro cities (Delhi, Mumbai, Chennai and Kolkata) or 40% of Basic Salary + DA in case of other cities.
• Actual HRA received by employee from employer as part of salary.
• Actual rent paid by employee less 10% of Basic Salary.

Examples of Tax Exemption on House Rent:

Example 1:Person X earns a basic salary of Rs. 40,000 per month and rents an apartment in Delhi for Rs. 20,000 per month.

In this case, no Income Tax exemption on rent paid by person X because there is no HRA component mentioned in his / her salary package.

Example 2:Person X earns a basic salary of Rs. 40,000 per month, Rs. 25,000 per month as HRA. He / She pays rent of Rs. 20,000 for an apartment in Delhi.

In this case, the least value of following three will be exempted from Income Tax:

50% of Basic Salary : 20,000/-

Actual HRA : 25,000/-

Actual Rent - 10% Basic Salary : 20,000/- - 4,000/- = 16,000/-

Example 3:Person X earns a basic salary of Rs. 40,000 per month, Rs. 25,000 per month as HRA. He / She pays rent of Rs. 22,000 for an apartment in Pune.

In this case, the least value of following three will be exempted from Income Tax:
40% of Basic Salary : 16,000/-
Actual HRA : 25,000/-
Actual Rent - 10% Basic Salary : 22,000/- - 4,000/- = 18,000/-

FAQ on HRA:

Can I pay rent to my parents or spouse to avail HRA benefits?

You can pay rent to your parents, however, they need to account for the same under’Income from House property’ and will be entitled to pay tax for the same.

On the other hand, you cannot pay rent to your spouse. In view of the relationship when you take up residence together, you are expected to do so and hence such a transaction does not bear merit under tax laws.

Can I simultaneously avail tax benefits on my home loan and HRA?

The tax benefits for home loan and HRA are two separate entities and have no direct bearing on each other.

As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under income from other sources.

Do I need to submit any proof for my HRA claim?

You need to submit proof of rent paid through rent receipts. It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it etc.

If rent paid is more than 15,000/- then PAN of owner must be required.

Section 80C

What is Section 80C?

80C is section of Income Tax Act in which government encourages individuals to invest in some financial products and save tax on income. These financial products are necessary & useful for individuals. It will be useful for their dependents, children and their life style after retirement.

Following financial products are included under Section 80C:

PF - Provident Fund is directly deducted from salary by employer. Employer submit this amount in Government provident fund or private provident fund. Employee can contribute additional amount through VPF (Voluntary Provident Fund) which also covered under this section.

PPF - Public Provident Fund. Individual can open PPF account in any nationalized bank / Post Office and deposit some amount in this account every year. There are some limitation on amount (Minimum: 500 & Maximum: 70,000). Individual can withdraw this amount after specific period on some special occasions.

NSC - National Savings Certificate are issued by Post Office. It's maturity period is 6 years & some specific interest rate (declared by Government of India in Finance Budget). Interest earned by NSC is taxable. Its like Fixed Deposit in Post Office. Individual can take loan on NSC.

Life Insurance Premium - Life Insurance premium paid by individual for their life insurance policy. Life insurance premium paid for  spouse and children's life insurance policy are also considered. Individual can take multiple life insurance policies for them and spouse and their children.
Income Tax on maturity of insurance policy depends on policy issued by company.

FD - Fixed Deposit in scheduled or nationalized banks. These banks has Tax Saving Deposits which has tenure of 5 years and specific interest rates. Interest rates changed based on RBI policies.

ELSS - Equity Linked Saving Scheme / Mutual Fund. Mutual Fund companies design some Tax Saving funds which has some locking periods like 3 years. Individual can invest in these Funds, mutual fund companies invest these money in Equity (Stock / Money market etc). Mutual fund companies has some Fund managers who has knowledge of Stock market. 

Individual can also invest in ELSS through SIP (Systematic Investment Plan) - Every month some specific amount (it depends on individual).

Return of ELSS is not guaranteed because its purely based on equity / stock market. Sometimes its good because not all individual has knowledge of stock market.

ULIP - Unit Linked Insurance Policy Premium. Premium paid for ULIP for them, Spouse and their children. ULIP is same as normal life insurance policy but policy amount invested in equity, debt or money market. It's return based on performance of stock market.

Home Loan Principal Repayment - Home Loan EMI consists two parts: Principal & Interest. Principal payment of home loan considered for exemption under this section.

Stamp Duty & Registration Charges of Home - Stamp Duty and Registration charges paid by individual for home can be exempted under this section.

Child Education Expense - School / Tuition fees of children paid by individual  can be exempted under this section. Individual can claim only two children's fees under this section.

Limit of Section 80C:

Current limit of section 80C is 1,00,000/-. Individual can take benefit of above financial products (sum of all) up to 1,00,000/- per financial year. If total amount exceeds 1,00,000/- then only 1,00,000/- can be considered under this section.

Note: Government of India will make change in this Section 80C based on current condition of economy in country & world.