HRA is provided to employees to offset/balance the cost of living depending on the city/region they live in. The cost of living in a particular city/region can be higher or lower than other cities/regions of the country based on multiple factors, such as taxes, food expenses, cost of groceries and house rents.
Employees, who live in rented houses, can claim HRA to lower their taxable income. HRA can be partially or completely exempt from taxes. The HRA is for expenses related to rented accommodation.
For employees, who don’t live in rented accommodations, this allowance is fully taxable. If you live in an owned property you may consider getting some relief on the interest and principal paid towards home loan installments.
The tax exemption on HRA is equal to the lowest of the following four amounts:
Generally, metro cities have higher house rents than non-metro cities. Therefore, the exemption percentage is higher for metro cities.
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As the lowest of the above four amounts will be exempt from tax, the employee can ask his/her employer to restructure the salary to get maximum tax benefit.
Sam lives in Bengaluru and earns a basic salary of INR 50,000 pm. The HRA component of his salary is INR 20,000 but the actual rent paid by him is INR 10,000. How much exemption will he get?
To answer this question, look at the factors that impact HRA calculation to get the lowest amount:
INR 60,000 is the lowest amount among the above obtained figures. Therefore, Sam will get INR 60,000 exemption on HRA.
Yes. Employees can claim both tax exemptions together. If an employee is a houseowner, who’s paying home loan but living in a rented accommodation, then he/she can get tax benefits for both cases.
Here are the various scenarios possible wherein an employee can claim HRA:
HRA benefits can be claimed if an employee pays rent to his/her landlord (owner of the property) where the employee lives. However, the owner can be anyone including the employee’s parents, relatives or friends.
There should be a legally valid rental agreement between the houseowner and the employee and there should be proof that the employee is paying the required rent each month to the landlord.
Yes, if the employee’s rent is higher than INR 1 lakh p.a., then it is mandatory to mention the PAN number of the landlord in the rental agreement to claim tax exemption on HRA.
Yes, Section 80GG of the Income Tax Act allows tax deduction to the employee living on rent even if he/she does not get HRA from his employer.
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