HRA exemption rules: Were there any changes announced in house rent allowance in Budget 2023? Usually, HRA is part of the CTC of an employee
Finance Minister Nirmala Sitharaman has dashed the hopes of many salaried individuals in Budget 2023 as there were no changes announced in the calculation of tax exemption on house rent allowance (HRA). This would effectively mean that salaried individuals will continue to use the same method to calculate and claim HRA tax exemption in the new financial year 2023-24, starting from April 1, 2023, as they were doing in the current financial year 2022-23.What is the current HRA tax exemption rules?
An individual can claim tax exemption under section 10(13A) of the Income-tax Act, 1961. Usually, HRA is part of the CTC of an employee. To claim the tax exemption, an individual must be living in a rented accommodation during the financial year. If he/she is living in his/her own house or not living in a rented accommodation, then the HRA received will be taxable.
This tax exemption can be claimed only by salaried taxpayers from the salary income before arriving at the gross total income. However, if your income source does not have salary, then you cannot claim tax exemption on HRA. Thus, one can say that self-employed professionals cannot claim this tax exemption.
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What’s in the Budget for MSMEs? Here’s a quick ...123456789101112The tax exemption on HRA can be claimed only if an individual opts for the old income tax regime in a financial year. Effective from FY 2020-21, an individual has the option to continue with the old income tax regime and claim common tax deductions (section 80C, 80D etc.) and tax exemptions (HRA, LTA etc.) Alternatively, he/she can opt for new income tax regime by foregoing approximately 70 tax deductions and tax exemptions. How HRA exemption is calculated
The Income-tax Act has prescribed the formula using which an individual can calculate HRA tax exemption. Amount of HRA which is exempted from tax is the minimum of:
a)Actual HRA amount received from employer
b)50% of annual salary (if living in metro cities) or 40% (for non-metro cities)
c)Excess of annual rent paid over 10% of annual salary
Usually, basic salary is considered for calculating HRA tax exemption. However, it may happen that an individual is receiving Dearness Allowance (DA) which forms part of retirement benefits, then that will also be considered for the purpose of salary. Similarly, commission received (if applicable) on the basis of sales turnover will also be added to the salary to calculate HRA exemption amount.
Do note that the tax exemption is calculated for the period for which house is rented. Thus, if someone has lived in a rented house for 8 months, then tax exemption will be available for 8 months only.
Here is an example how an individual can calculate tax exemption on the HRA received.
Suppose an individual is living in a metro city and paying monthly rent of Rs 18,000. His basic monthly salary is Rs 40,000 and he is receiving Rs 20,000 as HRA. The amount of HRA on which tax exemption can be claimed will be:
a)Actual HRA received = Rs 2,40,000 (20,000X12)
b)50% of salary in metro city = Rs 2,40,000 (50% of (Rs 40,000*12))
c)Excess of rent paid annually over 10% of annual salary = Rs 1,68,000 (Rs 2,16,000* - Rs 48,000**)
*18,000X 12 = Rs 2,16,000
**10% of (Rs 40,000X12) = Rs 48,000
Hence, an individual will be eligible to claim tax exemption of Rs 1,68,000. The balance Rs 72,000 (Rs 2,40,000 - Rs 1,68,000) will be added to the taxable income. The income tax payable will be calculated on the income tax rate applicable to their income slab.
Documents required to claim HRA tax exemption
To claim HRA exemption, an individual is required to submit rent receipts or rent agreement to the employer. PAN of landlord is mandatorily required to be submitted to the employer if annual rent exceeds Rs 1 lakh.
However, if may happen that you have forgotten to submit these documents to your employer. In such a case, you can still claim HRA exemption at the time of filing ITR.
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This story originally appeared on: India Times - Author:Faqs of Insurances
