How HRA Exemption Is Calculated And How Much Tax Can You Save?

There are various components to the salary paid by your employer and each component has a function. Your net income is made up of allowances, basic salary, and other perks. It is important to know the implications of these on your payable tax.

Once you have reviewed your salary structure, it is essential to know facts like, which parts of your salary are variable? Which components contribute to tax deductions. These basic questions will help you save more, and point you in the direction of appropriate investments.

No one likes to miss out on options that can save them money, paid as tax. Everyone has their own way of utilizing their benefits and making the best of them and that is why to save tax you must first assess your income and identify the benefits that have been mentioned in the Income Tax Act that are applicable to you.

If you are thinking how to save income tax in India, read ahead to know the smart ways you can save tax.

As per sections mentioned in the ACT, you are eligible to save tax by claiming deductions on investment like interest on savings account, house rent paid, interest on education loan, interest on home loan, in case you are the guardian or parent of diasabled dependent and medical insurance premiums under the sections there are specifications that can help you save tax, like investment in ELSS funds, life insurance premiums, EPF, Sukanya Samriddhi Yojana, and PPF.

Some factors like EPF and HRA are taken care of by your employer. That is why it is important to know the benefits as well as identify the scope to save tax.

What is HRA?

One of the components of your salary structure is the HRA or the House Rent Allowance. Most companies either provide accommodation or provide this allowance so that you can rent a place on your own. Unlike the basic salary, this component is not fully taxable.

Who can avail of HRA tax exemption?

HRA tax exemption can be availed by a salaried person, who has HRA as a component of their salary structure. Tax exemption on HRA can be claimed by people living in rental houses. The entire amount of your HRA becomes taxable if you stay in your own house or do not pay rent. This benefit can only be availed if you can produce an agreement with the owner or rent receipts.

If you are not getting paid HRA by your employer, or you are a self-employed person, who is incurring rental expenses, you can claim the deductions for the rent paid under section 80 GG of the Income Tax Act.

How much HRA is exempt from tax?

The tax benefit is available to the person only for the period in which the rented house is occupied. Tax exemptions for HRA are the minimum of –

● Actual HRA received in the salary structure
● For people living in metro cities (Mumbai, Delhi, Kolkata, Chennai) it is 50 % of the salary
● For people living in other cities, it is 40% of the salary
● Actual rent paid by you each month minus 10% of salary

Salary here refers to the basic salary and dearness allowance.

Under section 80GG least of the following can be exempted from tax –

● Rent paid more than 10% of total income
● 25% of total income
● 5,000 rupees per month

How is an exemption on HRA calculated?

It may be difficult to consider all terms and conditions and calculate the exemption on HRA yourself. The easiest way to know what your entitlement is, by going online and using the HRA exemption calculator. You have to enter details like your basic salary, dearness allowance, and HRA amount, along with your rent. You have to choose the city you live in, (metro city or non-metro city) and just click a button! Your calculations will be done for you and you can instantly find out the exempted amount.

Conditions for tax exemptions related to HRA

There are few conditions that need to be fulfilled based on which you are eligible for exemption of tax.

● Owning a property – While claiming tax deductions, you must remember that the house you reside in must not be owned by you, your spouse, or your minor child. If you own a property and are earning the rent from the same, you cannot apply for a tax deduction. If you own the house and rent a place in the same city, you are not eligible for tax exemption unless you show that the house you own is far from the job location or cannot be used for residential purposes.
● If the employer refuses to provide for tax benefits, you can claim the exemption when you file the income tax returns.
● If both husband and wife are earning, only one of them can claim tax exemption after producing the rent receipt.
● The exemption is provided only when the amount is paid to the landlord.
● This can be claimed by individuals or Hindu Undivided Families.
● Documents that need to be produced to claim tax exemption on HRA are-

a. If the rent paid for the house is more than 1 lakh rupees for a year, you can claim HRA tax exemption provided you produce PAN details of the owner, along with rent receipts.

b. One receipt is used for 3 months so the last 4 receipts of rent should include the date of occupation of the rented house, name of the landlord, PAN card details, address, duration of stay, name of the tenant, revenue stamp, and attested xerox of the agreement.

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Exceptions to the rule:

● Paying rent to family members – If you are paying rent to your family members (spouse not included), you need to have proof of transactions regarding your tenancy.
● Own a house but staying in a different city – You can claim the benefits of tax exemptions if the house you own is not in the same city or far away from your residential location.

The stringent rule and regulations have been laid down to ensure the exemptions are made available to people who are eligible for the same. Every penny saved is a penny earned. It is important to know what are the best ways to save money by availing of all the benefits through legal ways.