House Rent Allowance (HRA): Rules, Exemptions, and Deductions

What is HRA?

House Rent Allowance (HRA) is paid by an employer to employees as a part of their salaries to meet accommodation expenses. Salaried individuals who live in rental premises can claim tax benefits for the amount of rent they pay every year. Employees are required to submit the rent receipts to their employers in order to claim the tax benefit. The employers, in turn, will calculate exempt HRA and deduct the same from employee’s taxable salary.

You can go for a rental agreement with anyone except your spouse and claim HRA. So, if you have a rental agreement with your parents, you can ask for House rent allowance from your employer.

How to calculate exempt HRA?

The least of the following will be deducted from salary as exempt HRA

• Amount received as HRA from employer
• Actual rent paid less 10% of basic salary
• 50% of basic salary if he lives in metro or 40% of basic salary if lives in non metro

What if I don’t receive any HRA?

Under Section 80GG, a deduction is allowed to an individual who pays rent without receiving any HRA. So you can claim a deduction from total income if…

• You are paying House rent.
• You don’t receive any House Rent Allowance from your employer.
• You or your spouse or minor children do not own residential accommodation at the place of employment.
• You do not own self-occupied residential accommodation at any other place.

If all these conditions are fulfilled, a deduction is available as the least of the…

• Rent paid minus 10% of the total income.
• Rs. 2000 per month i.e annually Rs. 24,000.
• 25% of the total income.

The important point to keep in mind is that deduction under Section 80GG is not allowed to an individual who receives HRA from an employer. So, before you e-file this year, check your Form-16 to see if you are receiving any HRA as part of your total income. If you do, you can’t claim a deduction for rent paid under section 80GG.

Tax calculation with HRA

Sameer works for an IT company in Mumbai and receives monthly salary of Rs. 60,000. He is paid HRA of Rs. 25,000 per month.

He pays monthly house rent of Rs. 20,000 to his landlord So now, the least of these three will be deductible from Taxes:

• Full amount of HRA: Rs. 25,000
• Rent Paid minus 10% of Salary: 20,000-6000 = Rs. 14,000
• 50% of the monthly Salary for residents of Metro Cities: Rs. 30,000

Thus, Rs. 14,000 will be exempt from his income and 25,000-14,000 = Rs. 9000 will be liable for Taxes. This makes Taxable monthly salary Rs.46,000.

Tax calculation without HRA

In such case, least from the following will be exempt from Taxes:

• Rent paid minus 10% of the total income: 20,000-6000= Rs. 14,000
• Rs. 2000 per month i.e annually Rs. 24,000.
• 25% of the total income: Rs. 15,000

Thus, Rs. 2000 (per month) will be exempt from Sameer’s monthly salary, which makes Rs. 58,000 as Taxable salary!

Can I claim both HRA and deduction on Home loan?

Yes, you can. The benefits of HRA and deduction for Home Loan can be availed simultaneously.

If you are living in a rental house & your own house is occupied by your spouse, children and/or your parents, you can claim:

• HRA for the rent you pay to landlord &
• Deduction for Home Loan interest upto a maximum of Rs. 2,00,000

If you are living in a rental house & your own house is also given on rent, you can claim:

• HRA for the rent you pay to the landlord &
• Deduction for Home Loan interest without any limit

Frequently Asked Questions

1. How to calculate exemption on HRA?

Exemption on HRA is lowest of

• Actual House Rent Allowance received from employer
• 50% (for Metro) or 40% (for Non-Metro) of basic salary
• Annual Rent Paid – 10% of Basic Salary

2. Is HRA deductible under section 80C?

HRA is an allowance and is exempt under section 10. However if you did not receive HRA from your employer, you can claim rent paid for self-occupied house property as deduction under section 80GG. Limit for same has been increased to Rs. 60,000 from AY 2017-18.