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HRA Exemption - Maximize Tax Benefit In India

We have already talked about what house rent allowance (HRA) is and how it can help you save money on rent as well as via tax return. Thanks to Section 10(13A), those who are salaried employees and are living in a rented accommodation an avail this exemption and save on money that they pay as rent on a monthly basis.

Even those who are not salaried or are self-employed can the benefits of house rent allowance under section 80CG, which is a similar law to 10(13A) but has certain conditions that have to be fulfilled. HRA exemption can be claimed for:

1.    A set amount of HRA as received from the employer
2.    Actual rent paid which is in excess of 10 per cent annual salary
3.    50 per cent of basic pay if you live in metro cities and 40 per cent at non-metro cities
Under the term ‘salary’ for which HRA exemption can be claimed, these can be included:
1.    Basic salary
2.    Dearness allowance if it is provided by employer
3.    Any commission paid to the employee

Some Important Criteria To Be Fulfilled

 There are some points to be remembered while filing for tax exemption under HRA:

1.   A rent receipt is to be submitted by the employee, which acts as proof that such a transaction has taken place. Rental agreement will also be needed in some cases. However, the employer does not have to verify said receipt when he is granting HRA exemption to the employee.
2.    In case the rent is below Rs 3,000, no rent receipt is required. Also, if the rent amount paid exceeds Rs 1 lakh annually, then PAN number of the landlord has to be shown. In case the landlord does not have a PAN cad, then a declaration regarding the same has to be submitted by the employee with details like name and address of the landlord.
3.    The rent receipt needs to have a one rupee revenue stamp with signatures of the landlord (or person who receives the rent), along with details such as address of residence, rent amount being paid, name of tenant etc.
4.    Even if the employee owns a property, as long as it is outside the city of his employment and residence, he can get HRA exemption, as long as he is staying in a rented accommodation (like when the employee owns a house outside the city of his job location).
5.    Even in cases where the employee has a housing loan against his name, he can avail deduction under Section 24 of the Income Tax Act and repayment of principal for the loan under Section 80C, while also claiming HRA exemption for his rented accommodation.

Maximize Benefit Even If You Stay With Parents/Spouse

Even in cases where you stay with parents and/or spouse and pay them rent, you can apply for HRA exemption. The Income Tax Department sees every individual as separate entities, which means they are looked as having their own incomes. So when you pay rent to your parents or spouse also, claiming house rent allowance is possible. However, the rent that you pay to family members should appear as income for the rent receiver.

And if the person getting this income does not have any other source of income, then this rent that they receive becomes even more important. They may not even cross the current minimum tax payment slab f Rs 2.5 lakh, while you can claim tax exemption on this amount paid as rent. Hence, more tax is saved and it benefits the family. However, if your parents or spouse pays tax, then they will have to own the property, while they also showing the rent that you paid them as part of their income tax return.

Know What Factors Determine Your HRA

a. Your salary: The amount that you earn from your efforts at work
b. Actual rent paid: The amount of rent paid to the landlord, as per the agreement
c. HRA mentioned for and provided by employer: The amount that is to be exempted for your rental needs as given on your work contract
d. Location of residence (metro or non-metro city): If you live in a metro city, then the house rent allowance share will be higher, as rent is higher in such cities, while it is lower in a non-metro city

Let US Look At An Example

Aakash has received the following amount as salary for the year gone by:

Salary: Rs 1,20,000 (12,000 per month)
Dearness Allowance: Rs 14,400 (1,200 per month)
HRA: Rs 24,000 (2000 per month)
Rent paid: Rs 18,000 (1,500 per month)
Minimum from above will be exempt:
Actual HRA = Rs 24,000
Rent paid in over 10 per cent annual salary = Rs 10,560 (24,000-13,440)
50 per cent of salary (we assume he is living in a metro city) = Rs 53,760

Which means the HRA exemption will amount to Rs 10,560, with balance 13,440 to be included in gross salary.

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