The end of another financial year is drawing close and soon the words “income-tax” will start ringing a frantic bell in everyone’s minds. It is best to stay prepared from now in order to avoid confusion at the end.
There are many tax components you need to be clear about and also figure out how to plan your investments to gain maximum returns as well as maximum tax benefits. One such component is the tax benefit you can claim from your house rent allowance. This article helps you understand how this works.
HRA (house rent allowance) is provided to the salaried people under Section 10 (13A) of Income-Tax Act, 1961, in accordance with rule 2A of Income-Tax Rules. Self employed professionals are eligible for tax deductions under section 80GG of the Income-Tax Act, 1961.
What factors are taken into account while calculating HRA
When you are calculating HRA for tax exemption, you take into consideration four aspects which includes salary, HRA received, the actual rent paid and where you reside, i.e. if it is a metro or non-metro. If these aspects remain constant through the year, then tax exemption is calculated as a whole annually; if this is subject to change, as in a rent hike or shift in residence etc. then it is calculated on a monthly basis.
How is place of residence important
The place of residence is significant in HRA calculation as for a metro the tax exemption for HRA is 50 per cent of the basic salary while for non-metros it is 40 per cent of the basic salary. On paying rent, it is not essential that you should pay rent only to a landlord to avail your HRA benefits. You can pay rent to your parents to claim tax benefits. However, they need to account for the same under income from house/property’ and will be entitled to pay tax for the same.
Remember that you cannot pay rent to your spouse as you are expected to reside together for all practical purposes. You need to submit proof of rent paid through rent receipts, for which only two need to be submitted, one at the beginning of the year and one towards the end of the financial year. It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it etc.
How to calculate HRA
To figure out how much HRA exemption you are eligible for, consider these three values:
1. The actual rent allowance the employer provides you as part of your salary.
2. The actual rent you pay for your house from which 10 per cent of your basic pay is deducted.
3. 50 per cent of your basic salary when you reside in a metro or 40 per cent if you reside in a non-metro.
The least of these three values is allowed as tax exemption on your HRA. You can discuss restructuring your pay structure with your employer in order to avail the most of your HRA tax benefit.
How to avail tax benefits on your HRA
As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA component of your salary, while also availing tax benefits on your home loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own.
CALCULATE
Sandeep earns a basic salary of Rs 40,000 per month and rents an apartment in Delhi for Rs 20,000 per month (hence eligible for a 50 % of the basic pay for HRA exemption). The actual HRA he receives is Rs 25,000. These values are considered to find out her HRA tax exemption:
Actual hra:
Rs 25,000, 50% of Rs 40,000 = Rs 20,000
Excess of rent paid:
10% of salary, i.e. Rs 20,000 - Rs 4,000 = Rs 16,000
Exemption:
The value considered for his actual HRA exemption will be the least value of the above Figures. Hence, the net taxable HRA for Sandeep will be: Rs 25,000 - Rs 16,000 (available HRA deduction) = Rs 9,000.