House Rent Allowance (HRA)

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House Rent Allowance (HRA)

House Rent Allowance (HRA) is the remuneration which is provided by the employer to an employee for meeting the rental expenses paid for the residential accommodation used by the employee. House Rent Allowance provided by employers to employees is exempt from Income Tax up to a certain limit. Thus, for tax planning, the employer and employee must carefully plan the amount of HRA provided in the employment contract or appointment letter.

Amount of HRA Deduction

The amount of HRA exempt under Section 10(13A) of the Income Tax Act is the lower of the following three amounts:

  • Actual house rent allowance received by the employee.
  • Excess rent paid for the accommodation occupied by the employee over 10% of the salary amount.
  • 50% of the salary, if the residential house is situated at Delhi, Mumbai, Chennai or Calcutta. In case of any other city, then 40% of the salary.

The amount received by the employee as HRA over and above the amount of HRA exemption will be taxable under the head salary. It is also important to note that if the employee has not actually incurred expenditure on payment of rent or stays in their own accommodation, then HRA exemption is not available.

How to Claim HRA Deduction?

In the past, employers were not required to check if the employee actually incurred rent expenses. Hence, there were instances of employees claiming HRA exemption using fake rent receipts. To curb the improper claiming of HRA deduction, the Income Tax Department has amended the Act with effect from 1st June 2017. Now, the tenant will have to furnish the PAN of the landlord, if rent is over Rs.1 lakh per annum. Also, the employees will have to produce TDS receipts for claiming the HRA benefit. The assessee may be occupying rented premises and at the same time availing HRA deduction in accordance with the provisions mentioned above. In such cases, the assessee is not debarred from claiming deductions under other provisions of the Act, including Section 24, Section 80C and Section 80EE.

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