What is House Rent Allowance ?
House Rent Allowance (HRA) is a common component of most Emplyees salary packages. It is a crucial component of the salary package which is provided by the employer to the employee to meet the expenditure incurred on payment of rent for a residential accomodation. HRA is fully/ partially deductible for tax purposes under section 10(13A) of the Income Tax Act.
How to calculate HRA exemption ?
The least of the following amounts is allowed as deduction (exemption) for HRA:
Actual HRA received from the employer
50% of {Basic salary + Dearness allowance} (if based in Delhi, Kolkata, Mumbai and Chennai) & 40% of {Basic salary + Dearness allowance} (for all other cities)
Rent paid minus (-) 10% of {Basic salary + Dearness allowance}
Conditions for claiming HRA exemption
To claim HRA exemption under section 10(13A), an employee must satisfy the following conditions:
Must be a salaried employee
Receive HRA as a component of the compensation
Live in a rented accommodation
Must submit rent receipts and proof of payments to the employer
Illustration for Understanding
Mr. Anshul employed in Mumbai, has taken up an accommodation on rent for which he pays Rs. 12,000 as rent per month. During the financial year he receives Basic salary of Rs. 25,000 and Dearness allowance of Rs. 3,000, which forms part of his salary. He also received an HRA of Rs. 10,000 per month.
Let us understand the HRA component that would be exempt from tax during the financial year :
HRA received – Rs. 10,000 * 12 = Rs. 1,20,000 per annum
50% of Basic salary + Dearness allowance {Since live in Mumbai} = 50% * (25,000 + 3,000) * 12 = Rs. 1,68,000 per annum
Rent paid minus (-) 10% of {Basic salary + Dearness allowance} = 12,000 – 10 % * { 25,000 + 3000 } * 12 = Rs. 1,10,400 per annum
Therefore, the entire HRA amount received of Rs. 10,000 per month {Rs. 1,20,000 per annum} is not exempt from tax.
Only least of above i.e. Rs. 1,10,400 per annum {or Rs. 9,200 per month} is allowed as deduction from HRA.
Hence balance HRA { Rs. 1,20,000 – Rs. 1,10,400 } = Rs. 9,600 will be taxed in the hands of employee under head Salaries.
Documents to be submitted to employer for HRA deduction
Following documents needs to be submitted with the employer:
PAN card of the landlord – where rent paid exceeds Rs. 1,00,000 per annum
Rent receipts
Rent agreement
Address of the rented accommodation
Bank payment / corresponding cash withdrawals for proof of payment
How to submit proofs in NexWage (this will be updated later also) – Depending on actual discussion with our developer?
Employee should login into the web-portal or mobile application with their credentials.
At the beginning of the year, employees will be able to update the details based on a declaration.
At the end of the year, employees need to submit proofs (as actuals) through the web portal or mobile application to avoid reversal of exemptions by employer.
