House Rent Allowance, or HRA, is a significant component of a salaried employee’s income. The company pays HRA as a form of compensation for the employee’s accommodation expenditures.

HRA also makes up a significant portion of an employee’s salary and can result in a significant amount of tax if the applicable HRA income tax exemption is not used.

Furthermore, HRA deductions can be claimed by both employees and self-employed individuals. We will go over everything about HRA deductions and how to claim them (You can also calculate your HRA here)

What is House Rent Allowance (HRA) exemption?

HRA allowance exemption refers to the amount of tax deduction that a salaried employee or self-employed individual can claim against his or her annual income when submitting an ITR. HRA deduction allows an individual to reduce his or her annual income and save some tax. 

HRA deduction for salaried employees

The House Rent Allowance (HRA) for salaried employees is defined under Section 10 (13A) of the Income Tax Act. Furthermore, rule 2A specifies the amount of exemption allowed under the section.

Please note that the house rent allowance tax exemption is not available in case you choose the New Tax Regime. 

Calculation of HRA Exemption – Salaried employees

Salaried individuals can claim a tax deduction of the least of the following under the HRA exemption section:

• Actual rent paid
• Actual amount of HRA received from the employer
• In metro cities: 50% of the salary (basic salary + DA)
• In non-metro cities: 40% of the salary (basic salary + DA)
• Actual rent paid (-) 10% of basic salary + DA

Let us understand this with an example:

To understand the HRA calculation formula better, let us consider an example:

Nayan Shetty works for an MNC in Kolkata. He lives in a rented house, paying ₹10,000 per month. His salary structure looks like this:

Component	Amount (INR/ ₹)
Basic Pay	30,000
HRA	13,000
Allowances	7,900
Provident fund	3,600
Total Salary	54,500

When Nayan applies the HRA formula, he gets:

1.  An annual HRA of Rs 1,56,000 as sanctioned by his employer (Rs 13,000 x 12 = Rs 1,56,000)
2. The actual rent paid is Rs 1,20,000 per year. Using the HRA calculation formula of actual rent minus 10% of basic pay, he gets Rs 84,000 (Rs 10,000 x 12 – Rs 36,000 = Rs 84,000)
3. Since he lives in a metro, 50% of his basic salary would be Rs 1,80,000

The lowest of the three is ₹84,000, which he can claim as an HRA tax exemption. To avoid confusion, you can use this HRA exemption calculator to ascertain your HRA deduction.

How to claim HRA tax deduction

The process of claiming tax exemption on HRA is simple. You just need to submit rent receipts while filing ITR, which will serve as proof or record of the tax exemption that you are claiming. Note that if rent paid is over Rs 1 lakh in a financial year, you will also have to submit your landlord’s Permanent Account Number (PAN).

HRA for self-employed individuals

Self-employed individuals cannot claim HRA but can avail tax deductions against the money spent on rented accommodation under Section 80GG.

Also Read: Rent vs Buy: Why renting a house may be a better option for you now

Calculation of HRA exemption – Self-employed

Self-employed individuals can claim a maximum tax deduction on HRA on the least of the following amounts:

• Rs 5,000 per month
• 25% of the adjusted total income
• Actual rent minus 10% of the adjusted total income

Let us understand this with an example:

Suppose Piyush Tiwari pays a rent of Rs 5,000 per month and his adjusted income is Rs 4 lakh per annum. The maximum amount he can claim as a tax deduction can be understood from the table:

Condition	Maximum tax exemption Piyush can claim
Rs 5,000 per month	Rs 5,000 (Rs 60,000 per annum)
25% of the adjusted total income	Rs 1 lakh
Actual rent minus 10% of the adjusted total income	Rs 60,000 – 10% of Rs 4 lakh = Rs 20,000
Satisfied Condition	Rs 20,000

So Piyush can claim a tax deduction of Rs 20,000 per annum because it is the lowest amount among all the cases.

How to claim HRA tax deduction?

Just like the case of the salaried employees, the self-employed individual also needs to submit all the rent receipts while filing ITR. Also, in case the annual rent is over Rs 1 lakh, the taxpayer needs to furnish the PAN details of the landlord. Additionally, the self-employed individual also needs to file a declaration in Form 10BA.

What if you don’t receive an HRA?

If you pay rent for living in a residential accommodation but do not receive an HRA from your employer, you can still claim deduction under Section 80GG. Conditions that must be fulfilled to claim this deduction:

• You should either be self-employed or salaried.
• Throughout the relevant tax year, you shouldn’t have received any HRA from your employer.
• You, your spouse, your minor child, or a Hindu Undivided Family (HUF) of which you are a member should not own any residential accommodation in the city where you reside, carry out employment duties, or conduct business or profession.
• If you own any other residential in the place of your workplace so, within a 30 km radius you should not own any residential property to avail of the Section 80GG deduction. If the property is in your father’s name or your parent’s name then you can claim 80GG.

By fulfilling these conditions, you can claim tax deduction under Section 80GG for the rent you pay, even if you don’t receive HRA from your employer.

How to claim HRA when living with parents?

You can pay rent to your parents and claim the allowance provided. However, you have to enter into a rental agreement with parents and transfer money to them every month. Also, your parents need to report the rent you paid as their income in their income tax return. If their other income is below the basic exemption limit or taxable at a lower tax slab, they can save tax on the family income.

Here’s how it works:

 1️. Pay rent to your parents for staying in their house. 

2️. Your parents should be in a lower tax bracket than you.  

3️. They can claim a deduction of 30% on the annual rent for repairs and maintenance under Section 24 of the Income Tax Act. 

4️. The rent you pay becomes taxable in their hands, but they can avail of tax benefits on it. 

5. PAN card details must be shared if the rent exceeds Rs 1 lakh annually.

The deduction amount will be lower than the: 

• Actual rent paid minus 10% of your basic salary 
•  Total HRA that the employer provides you
•  40-50% of the basic salary depending on residential conditions

Disclaimer: The above content is for informational purposes only.

You can learn more about optimizing your taxes here.