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7 things you must know about HRA and tax benefits

Last updated on: February 21, 2011 13:21 IST

Ramya Ramachandran, Investmentyogi

House Rent Allowance (HRA), is an important component in most salary slips. It is the allowance given by an employer to meet employees' expenses towards renting an accommodation. Though very simple in concept and calculation, the tax implications of the HRA, puzzles many a people.

Here are 7 must knows to help you utilise this component of your salary in a tax-efficient manner.

Illustration: Uttam Ghosh

7 things you must know about HRA and tax benefits

1. Conditions you need to satisfy for a HRA exemption

Under Section 10 of the Income Tax Act, certain exemptions are permissible on the HRA. To claim such exemptions one must satisfy the conditions given below:

  • The employee must not own the property in which s/he is residing.
  • Employees must be paying rent for the accommodation in which s/he is residing.
  • Such rent must be more than 10 per cent of his/her salary.

Please note, an exemption cannot be availed if there is no HRA component in the salary.
2. Calculating HRA for tax exemption

Calculating HRA for tax exemption involves three important aspects. The least of the below three is exempt from tax.

  • The actual rental allowance paid by the employer as part of the salary.
  • The actual rent paid, from which, 10% of the basic pay is deducted,
  • 50% of the basic salary if residing in a metro or 40% if in a non-metro.

7 things you must know about HRA and tax benefits

3. HRA benefits in case of rent paid to parents

If you are residing in a house owned by your parents and you are paying rent to them, technically, they are the landlords. You could, thus, claim an exemption, provided they show the same transaction in their income tax returns.

Rent to spouse is not permissible, as a husband and wife relationship is not considered commercial. Spouses are meant to stay together.
4. Proof to be submitted for HRA claims

If the house rent paid is up to Rs 3000 per month, then rent receipt is not mandatory. Otherwise you will have to submit the rent receipt proofs to claim the tax deduction.

A one rupee revenue stamp affixed with the signature of landlord receiving the rent, with other details of the rented address, rent paid and name of the person who rents it, need to be mentioned on the receipt.

HRA and tax benefits: 7 must-know facts

5. Meaning of salary for HRA calculation

Salary for HRA purposes is as follows:

  • Basic salary
  • Dearness allowance, if provided
  • Commissions earned

This salary will not include arrears of earlier years, received during the previous year for which the claim is made.
6. You could claim HRA exemption as well as a home loan tax benefit at the same time

HRA exemption could be availed even if you are claiming a home loan tax benefit. For a home loan, tax benefits are available towards the repayment of principal.

So, as long as you meet the criteria for a home loan deduction as well for a HRA exemption, you could go ahead and claim both tax benefits. This could be possible, in cases where you may be working in another city.

HRA and tax benefits: 7 must-know facts

7. Period in which HRA exemption can be claimed

The period in which the HRA is actually received from the employer, must necessarily pertain to the period in which the employee actually pays rent for his/her accommodation.

In case HRA is received for a period in which no rental accommodation is occupied by the employee, exemption cannot be claimed.

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