HRA Exemption – Maximize Tax Benefit in India

HRA or House Rent Allowance is the allowance that is given to an employee from the employer in order for them to pay for the rental accommodation charges for where they are living.

This is primarily meant for those people who work outside of their hometown and are in requirement of staying in a temporary accommodation situation. According to the new law for Income Tax, the house rent allowance that an employee is playing is exempted from paying tax. This is commonly known as HRA exemption.

There are a number of rules and regulations that need to be kept in mind for an individual who wants to be considered under the HRA exemption. Some of the necessary fields that need to be abided by the employer who is getting tax exemption from their employee are:

·       The House Rent Allowance needs to be given from the employer to the employee.

·    The actual rent for the accommodation is deducted from 10% of the basic salary of the  employee.

·    For those who are living in metropolitan cities like Mumbai, Kolkata, Delhi, and Chennai,  they are to be allotted 50% of their basic salary as House Rent Allowance.

·     For those who are working and living in non-metropolitan areas, their house rent allowance is usually 40% of the basic salary that they receive from the employer.

If the employee pays less for their rent and there is part of the house rent allowance remaining after he/she has paid for their accommodation, this remaining salary is added back to the basic salary of the employee which will now be taxable under the income tax.

Calculating and Understanding HRA Exemptions

The first thing that we need to understand before calculating the amount of exemption is the criteria for the exemption. For this, an example is an ideal way to understand the amount of money that is considered as non-taxable from the HRA exemption.

Rahul is an employee who works in a firm in Kolkata. The basic salary that he receives at the end of each month from this employer is Rs50, 000. The same employer pays him an amount of Rs15,000 as house rent allowance so that he can pay for the place that he has rented out and currently lives in. The amount of excess rent that is laid to the landlord over 10% of the basic salary of Rahul is Rs1,75,000. Between all the figures that are mentioned in the above example, the amount of money that is exempted from taxes is the minimum amount, i.e. 15,000 rupees. 15,000 rupees if Rahul’s HRA exemption amount.

Now, there are special cases that also need to be considered where Rahul is considered to be living with his parents in the same city and gets HRA allowance from his employer. Then for Rahul to make sure that HRA exemption is applied to him, he needs to submit the evidence that he pays rent to his parents for living there. The only condition for this to get through is if the house is in the name of Rahul’s parents and not in his own name. The HRA that the parents receive from Rahul should also be reflected in their income tax forms that they need to file at the end of each financial year.

HRA Exemption Benefits

Not all employees are allotted a separate House Rent Allowance from their employees and thus not all the employees can avail for the HRA exemption from their taxes. Only those individuals who have a separate allowance from their employer in the form of house rent are the ones that can ask for HRA claims and return benefits.

The best part about House Rent Allowance is that it is a separate salary allotted by the employer, so house rent is not deducted from the normal salary of an individual leaving them with very less amount of money for themselves and for purchasing their daily amenities and so on. The separate house rent allowance is a way of the employer or the company to ensure that the employers have a place to live and are able to afford it. The employee also checks if the place that they are living in is within the budget of the house rent salary that is provided to them.

Usually, the entire amount of money that is provided in the house rent allowance is exempted for tax completely or partially depending on the receipts for house rent that is provided by the employee. The house rent receipts are an important way of confirming that the house rent allowance that is provided to employees is being used by them. This serves as proof and can be added to one’s income tax form in order to avail the HRA return claims. The HRA exemption provides employees with more on their salary than what they already have.

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