What is HRA in Income Tax? A Complete Guide to House Rent Allowance and Tax Benefits

House Rent Allowance (HRA) is an essential part of a salaried individual's compensation package, designed to help employees manage their rental expenses. It not only provides financial support for housing but also offers significant tax benefits under the Income Tax Act. The exemption on HRA depends on factors like salary, rent paid, and city of residence, with metro cities allowing a higher deduction.

To claim the tax benefit, employees must provide rent receipts, and, in some cases, the landlord's PAN if the annual rent exceeds ₹1 lakh. By utilising HRA effectively, individuals can reduce their taxable income and maximise their savings.

What is HRA?

House Rent Allowance (HRA) is the money your employer gives you as part of your salary to help cover your rent. If you live in a rented house, you can also save tax on a part of this amount.

Is HRA taxable?

HRA is taxed as part of your salary income, but if you live in a rented house, you can claim a tax exemption on it under Section 10(13A) of the Income Tax Act. This means you can reduce your taxable income by the amount of HRA that qualifies for exemption.

But if you choose the new tax regime, you won't be eligible for this exemption. If you are not living in a rented place, the entire HRA amount becomes taxable.

How to calculate HRA exemption?

To calculate your HRA exemption, you need to compare the following three amounts and choose the lowest:

1. Actual HRA received from your employer.
2. 50% of your basic salary + DA (for those living in metro cities like Delhi, Kolkata, Mumbai, or Chennai) or 40% of your basic salary + DA (for those living in non-metro cities).
3. Actual rent paid minus 10% of your basic salary + DA.

The amount you get from these three calculations is the HRA exemption you can claim.

Why is HRA important?

• Helps with rent – Your company gives you extra money to manage rental expenses.
• Saves tax – A portion of HRA is tax-free, so you pay less tax.
• Encourages housing – It supports employees in affording a good place to stay.

Who can get HRA?

You can claim tax benefits on HRA if:

• You get HRA as part of your salary.
• You live in a rented house (own house doesn’t count).
• You actually pay rent and have proof (like rent receipts).

How much HRA is tax-free?

The tax-free part of HRA is the lowest of these three:

• The HRA amount your employer gives you.
• 50% of your salary (for metro cities) or 40% (for non-metro cities).
• Rent paid minus 10% of your salary.

HRA for salaried vs self-employed

• Salaried individuals: HRA can be claimed under Section 10(13A) if you meet certain conditions, such as living in a rented house and receiving HRA as part of your salary.
• Self-employed individuals: Self-employed individuals cannot claim HRA but can avail of tax deductions under Section 80GG.

Can I claim HRA and deduction on home loan interest?

Yes, you can claim both HRA exemption and home loan interest deduction under certain circumstances. Here's how it works in two situations:

1. Rented and owned house in the same city: If you live in a rented house while owning a property in the same city, you need to provide a valid reason for not staying in your own house.
   For example, if your office is far from your own house, you can justify the need to rent another place. In this case, you can claim both HRA exemption and home loan interest deduction, as long as the necessary conditions are met.

2. Rented and owned house in different cities: If your rented house and owned house are in different cities, and you had to move due to job-related reasons, you're eligible to claim both HRA and home loan benefits.

Claiming HRA when living with parents

If you are living with your parents but receive HRA, you can still claim it under the following conditions:

• Pay rent to your parents, ideally through bank transfers.
• Enter into a rental agreement with your parents.
• Your parents must report the rental income in their own tax returns.

What if I don't receive HRA?

Even if you don’t receive HRA from your employer, you can still claim a deduction under Section 80GG of the Income Tax Act, provided you meet certain conditions:

• You are either self-employed or salaried.
• You have not received any HRA at any point during the year you are claiming the deduction for.
• The rent you pay for your accommodation exceeds 10% of your total income.
• You (or your spouse, minor child, or HUF) do not own any residential property where you live, work, or carry out your business.
• If you own any other property, you cannot claim that as self-occupied; it should be treated as let out to qualify for HRA deduction.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.