Latest HRA tax exemption rules: Step-by-step guide on how to save income tax on house rent allowance under old income tax regime It's important to note that if an employee lives in their own house or does not pay any rent, the HRA received from the employer is fully taxable
The House Rent Allowance (HRA) is a portion of your salary that is not fully taxable, unlike your basic salary. Subject to specific conditions, a portion of the HRA is exempted from taxation under Section 10 (13A) of the Income-tax Act, 1961.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} The amount of HRA tax exemption is deducted from the total salary before calculating the taxable income. This helps employees save on taxes. However, it's important to note that HRA received from the employer is fully taxable if the employee lives in their own house or does not pay any rent.
Also read: HRA tax exemption: HRA fraud with illegal usage of PANs detected by tax dept; how to avail House Rent Allowance, proofs
The income tax laws have changed in the new tax regime starting from April 1, 2023. The income tax slabs have been reduced from six to five, the basic exemption limit has been increased to Rs 3 lakh, and standard deduction from salary and pension income has been introduced. The surcharge rate has been reduced for incomes above Rs 5 crore. The new tax regime is the default regime from the assessment year (AY) 2024-25 onwards, and there are no income tax changes for the financial year 2024-25.
If you choose the new tax regime in the current fiscal year 2024-25, you cannot claim tax exemption for HRA. However, if you choose the old tax system and receive HRA, you can claim tax exemption.
Who can avail HRA tax exemption?
This tax benefit is only accessible to salaried individuals who opt for the old tax regime and receive HRA as part of their salary structure while living in rented accommodation. Self-employed professionals are not eligible for this deduction.Use our HRA calculator to save income tax
How much of HRA is tax-exempt as per income tax laws?
The tax-exemption for HRA is the minimum of:i) Actual HRA received
ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and
iii) Excess of rent paid annually over 10% of basic salary & dearness allowance
When calculating for tax purposes, only the basic salary is considered. If the 'Dearness Allowance (DA)' or 'commission received based on sales turnover' forms part of retirement benefits, they are also included in the minimum HRA exemption calculation.
This tax benefit is only available for the period in which the rented house is occupied.
Example of tax-exemption on HRA
An individual with a monthly salary of Rs 20,000 in a metro city receives HRA of Rs. 8,000 and pays Rs. 10000 rent for accommodation. The individual falls under the 20% tax rate (applicable to income between Rs 5 lakh and Rs 10 lakh) in the old tax regime.
To avail HRA benefit, the least of the following amount (yearly) is exempted, rest is taxable:
i) Actual HRA received = Rs. 96,000 (8000 x 12)
ii) 50% of salary (metro city) = Rs. 1,20,000 (50% of Rs (20,000 x 12 = 2,40,000))
iii) Excess of rent paid annually over 10% of annual salary = Rs 96,000 (Rs .1,20,000* - (10% of Rs. 2,40,000))
*10,000X12 = 1,20,000
From the above example, the actual HRA received by an individual of Rs 96,000 will be exempt from tax. This is because the lowest amount is Rs 96,000 which will be exempt from tax.
Documents required to claim HRA tax exemption
To qualify for HRA tax exemption, you need to provide your employer with your rent receipts and rental agreement. Tax experts advise that having both the rental agreement and rent receipts from your landlord is necessary to claim the HRA tax exemption. If your annual rent payment exceeds Rs 1 lakh, you must provide your landlord's PAN to your employer to avail the tax benefit. The rent paid to your landlord will be reflected in their Annual Information Statement (AIS), as your employer will report the landlord's PAN in the TDS return statement, Form 24Q.Also read: 5 HRA tax exemption proofs you must have in case income tax dept asks
According to Fellow Chartered Accountant (FCA) Ashish Niraj "The Tenant should preferably pay Rent through Bank and should have Rent Receipt and Rent Agreement. However in absence of Rent Agreement and Bank Transfer, Tenant can claim deduction of Rent Paid in Cash provided Tenant has rent receipt and can establish that his Landlord has shown that rental income in his/her ITR."
Special cases to claim HRA tax exemption
Keep in mind that there may be unique situations when claiming HRA tax benefits, including:
1. Paying rent to Parents, wife and family members
The individual claiming the tax exemption cannot own the rented premises. If you live with your parents and pay them rent, you can claim tax exemption under HRA. The family member who receives the rent should declare it as 'income from house property' in their income tax return.Be sure to keep evidence such as bank transactions, rent receipts, and a rental agreement to prove that you are financially responsible for your tenancy. The tax department may reject your claim if they are not convinced of the authenticity of the transactions.
The Mumbai income tax appellate tribunal rejected a salaried taxpayer's HRA claim because the tax officials did not find it genuine. Paying rent to your wife could lead to legal issues, according to tax experts. Salaried individuals need thorough documentation to prove their claim for a tax exemption on House Rent Allowance (HRA) is genuine.
Also read: Budget 2024 HRA Exemption: Will Bengaluru, Hyderabad, other non-metro cities be included in 50% HRA tax exemption list?
2. Own a house, but staying in a different city
If you rent out your own home and work in another city, you can benefit from tax deductions for both the interest paid and principal repayment on your home loan, as well as for HRA.Individuals who don't get HRA but pay rent
Some employees may not have HRA included in their salary. Also, if you're not a salaried individual and you're paying rent, you may be eligible for assistance under Section 80GG of the Income-tax Act.If you rent a furnished or unfurnished place and do not receive House Rent Allowance as part of your salary, you can claim a deduction for the rent paid under Section 80(GG) of the Income-tax Act. To claim this deduction, you need to submit Form 10B. Please note that this deduction is available only under the old tax regime.
How much tax deduction available under section 80GG
The least of the following is available for exemption from tax under Section 80GG:(i) Rent paid in excess of 10% of total income
(ii) 25% of the total income*
(iii) Rs.5,000 per month
*Under this section, the total income is calculated as gross total income minus long-term capital gains, the short-term capital where Securities Transaction Tax (STT) has been paid and deductions available under Sections 80C to 80U, except Section 80GG.
Conditions to claim deduction under Section 80GG
When claiming a tax deduction, it's important to note that the person claiming the deduction, their spouse, or minor child, or a member of the Hindu Undivided Family (HUF) cannot own any accommodation. Additionally, no deduction is permitted if the individual owns a residential property anywhere and earns rental income from it.Remember, if you have a home loan, you can benefit from tax deductions for both the interest paid and principal repayment and from claiming House Rent Allowance (HRA) if your home is rented out or if you work in another city. However, these benefits are not available under Section 80GG.
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This story originally appeared on: India Times - Author:Faqs of Insurances
