Employees are being asked to choose their preferred tax regime as the financial year FY23-24 starts. Based on their selection, employers add income tax exemptions available to the employees. An employee may be eligible for HRA if he or she prefers the old tax regime. HRA is the benefit extended by employers to employees to compensate for their rental expenses. However, it may not be fully taxable.
HRA Exemption Calculation
The HRA amount deductable is determined by the employee’s basic salary, dearness allowance (DA), and the location of his residence. Basic salary refers to the amount paid to employees, excluding allowances and bonuses. DA is usually received by the public sector employees to help combat inflation.
According to the income tax website, the lowest amount of the following is deductible from income tax.
a) The actual HRA received.
b) Fifty per cent of basic salary of those living in metro cities like Delhi, Kolkata, Mumbai or Chennai or 40 per cent of basic salary for those living in non-metros.
c) Actual rent paid minus 10 per cent of basic salary.
If you receive DA, it should also be added to basic salary in above-mentioned calculation.
Let’s do the math with an example. Suppose an employee in New Delhi rents a house for Rs 15,000 per month and receives a basic salary of Rs 40,000 per month and his employer also provides him with a monthly HRA of Rs 17,000 and a DA of Rs 2,000.
In the first option, if his actual HRA is Rs. 17,000 x12= Rs. 2,04,000 (total annual HRA).
In the second option, the 50 per cent of basic salary plus DA, is Rs. 2,52,000, as he is works in Delhi,.
In the third scenario, the actual rent paid minus 10 per cent of basic salary plus DA, i.e., Rs. 15,000x12= Rs. 1,80,000 minus 10 per cent of basic salary plus DA(10 per cent of 42,000 x12)= Rs. 1,29,600
Here the lowest amount is coming to be the last option. So out of the Rs. 2,04,000 he receives as HRA, Rs. 1,29,600 is excluded from taxable income.
You can use the HRA exemption calculator on the Income Tax website to figure out the exempted and the taxable amount: https://incometaxindia.gov.in/Pages/tools/house-rent-allowance-calculator.aspx
Under the provisions of the Income Tax act, the exemption is not available when the assessee owns the premises he occupies or if he has not actually incurred rental expenses.
Those who are self-employed may also be eligible for tax deductions and tax exemptions that can be claimed in relation to rent under Section 80 GG of the Income Tax Act.
How To Claim HRA & Documents Required
To claim a house rent allowance benefit, the employee must submit rent receipts or rental agreements to the employer. You can also claim the HRA deduction when you file your ITR in July. However, your returns may be further probed by tax authorities and they may demand documentary evidence.
Hence, it is advisable to maintain a rent agreement, rent receipts and proof of payments via banking channels. If your HRA is up to Rs 3,000 per month, you can claim HRA without rent receipts.
If your rental payment exceeds Rs. 1 lakh annually, then it is mandatory to provide the PAN of your landlord to your employer.
