What is House Rent Allowance (HRA) ?
House Rent Allowance (HRA) is a component of the salary provided by an employer to an employee to meet the costs of renting a house or apartment. It is a common allowance offered in India and is part of the salary structure, typically given to employees working in cities with a high cost of living.
Here are some key points about HRA:
1. Purpose of HRA
HRA is provided to help employees with the cost of renting a home. It is primarily aimed at employees who live in rented accommodations.
The allowance is typically a percentage of the basic salary and can vary based on the company’s policies.
2. Tax Exemption on HRA
HRA is eligible for tax exemptions
under Section 10(13A) of the Income Tax Act, 1961, provided the employee meets certain conditions.
Exemption Formula: The exemption amount is calculated as the least of the following:
Actual HRA received.
Rent paid over 10% of the employee’s salary.
50% (for metro cities) or 40% (for non-metro cities) of the employee's salary.
To claim HRA exemptions, the employee must submit rent receipts as proof of payment, and the rented accommodation should be located in a city where the employee works.
3. Components of HRA
HRA is typically calculated based on the employee’s basic salary. Other factors such as the city in which the employee resides (metro vs. non-metro) may influence the percentage.
Employees who live in their own homes are not eligible for HRA exemptions but can claim deductions under Section 80GG if they do not receive HRA.
4. Eligibility Criteria for HRA
To receive HRA, employees must be paying rent for accommodation and living in a rented house.
If the employee is living with family and the rent is paid to a family member, the HRA exemption is still applicable, but the rent paid to family members should be reasonable.
If an employee lives in a self-owned house or is not paying rent, they are not eligible for HRA.
5. Taxation of HRA
The HRA amount that is not exempt will be included in the employee's taxable income and taxed according to their tax bracket.
Employees must provide the necessary documentation, such as rent receipts and landlord details, to claim exemptions.
6. Calculation of HRA
Example: Suppose an employee’s basic salary is ₹50,000, and their HRA is ₹20,000 per month. The employee pays a monthly rent of ₹15,000.
The HRA exemption could be calculated as the least of the following:
Actual HRA received: ₹20,000.
Rent paid - 10% of salary: ₹15,000 - ₹5,000 = ₹10,000.
50% of the salary (for metro cities): ₹25,000.
In this case, the HRA exemption would be ₹10,000.
7. Documents Required for HRA Exemption
Rent receipts or rent agreement.
Landlord’s PAN (if rent exceeds ₹1,00,000 annually).
Proof of payment (bank transfers, cheques, etc.).
In conclusion, HRA is a significant allowance provided to employees to help them meet their rental expenses, and it is tax-exempt under certain conditions, which can lead to tax savings for the employees. However, to claim exemptions, proper documentation is essential.