How to Save Income Tax on House Rent Allowance?
Last Updated : Feb. 13, 2024, 2:07 p.m.
House Rent Allowance is a component of salary paid to the employee by the employer in the favour of accommodation and cost of living in that city. But you might be not aware of the fact that HRA is a part of net salary and it is taxable as per the tax laws. So, under Section 10 (13A) of the Income Tax Act, there is a tax exemption through which you can reduce your tax liability. On the other hand, there is a rule for this exemption and you can save income tax on house rent allowance (HRA). Let’s explore the rule of HRA’s Exemption and see how it will help salaried individuals.
Old vs New Tax Regime (HRA Rules)
In the 2023-24 financial year, choosing the new tax regime forfeits claiming tax benefits for House Rent Allowance (HRA). However, opting for the old regime and receiving HRA allows you to claim this exemption. Remember, this decision is crucial for optimizing your tax savings.
Eligibility for Salaried Individuals (Old Tax Regime)
Are you a salaried employee choosing the old tax regime and receiving HRA in your salary? Here’s what you need to know about claiming HRA exemption:
- Eligibility: You qualify if you pay rent for your primary residence and receive HRA from your employer. Remember, self-employed individuals are not eligible.
- Exemption Amount: You can claim the lowest of these three amounts:
- Actual HRA received
- 50% of your basic salary (if living in a metro city), 40% if not
- Actual rent paid minus 10% of your basic salary
- Documentation: Maintain rent receipts and rental agreement for claiming the exemption.
Note – Opting for the new tax regime automatically waives your right to claim HRA deduction.
Tax Saved on HRA u/s 10 (13A) (Delhi, Chennai, Mumbai, and Kolkata)
| Particulars | Amount (INR) |
|---|---|
| Basic Salary | ₹40,000 p.m |
| House Rent Allowance Received | ₹15,000 p.m |
| Rent Paid | ₹18,000 p.m |
| Tax Rate Applicable | 20% |
- Actual HRA Received: ₹15,000/month x 12 months = ₹1,80,000 annually.
- Percentage of Salary: 50% of ₹40,000/month x 12 months = ₹2,40,000 annually.
- 10% of Salary – Actual Rent Paid: 10% of ₹40,000/month x 12 months = ₹48,000 annually.
- ₹18,000/month x 12 months = ₹2,16,000 annually.
- Difference: ₹2,16,000 – ₹48,000 = ₹1,68,000 annually.
Lowest of the three figures:
- ₹1,80,000
- ₹2,40,000
- ₹1,68,000
Therefore, you can claim an HRA exemption of ₹1,68,000, reducing your taxable income and saving taxes.
Tax Saved on HRA u/s 10(13A) (Non-Metro City)
| Particulars | Amount (INR) |
|---|---|
| Basic Salary | ₹30,000 p.m |
| House Rent Allowance Received | ₹12,000 p.m |
| Rent Paid | ₹14,000 p.m |
| Tax Rate Applicable | 20% |
- Actual HRA Received: ₹12,000/month x 12 months = ₹1,44,000 annually.
- Percentage of Salary: 40% of ₹30,000/month x 12 months = ₹1,44,000 annually.
- 10% of Salary – Actual Rent Paid: 10% of ₹30,000/month x 12 months = ₹36,000 annually.
- ₹14,000/month x 12 months = ₹1,68,000 annually.
- Difference: ₹1,68,000 – ₹36,000 = ₹1,32,000 annually.
Lowest of the three figures:
- ₹1,44,000
- ₹1,44,000
- ₹1,32,000
Therefore, you can claim an HRA exemption of ₹1,32,000, reducing the taxable income and saving taxes.
Documents Required for Claiming HRA Exemption (Old Tax Regime)
Claiming HRA exemption requires submitting specific documents to your employer for verification. Here’s the list:
Mandatory Documents
- Rent Receipts: These receipts, issued by your landlord, should include details like your name, landlord’s name, address, rental period, amount paid, and signature or stamp of the landlord. Ensure you have receipts for all rent payments made during the financial year.
- Rental Agreement: This legal document serves as proof of your tenancy agreement with the landlord. Ensure it’s valid and updated, mentioning details like monthly rent, duration, and terms of occupancy.
Additional Document (if applicable)
- Landlord’s PAN: If your annual rent exceeds ₹1 lakh, you must provide your landlord’s PAN card details to your employer. This requirement helps authorities track rental income and prevent tax evasion.
Tips for Submission:
- Submit photocopies of the documents to your employer for record-keeping and return the originals.
- Maintain a separate file for HRA documentation to simplify future filings.
- Ensure all documents are clear, legible, and contain accurate information.
Remember
- Failing to submit these documents could lead to your employer not granting the HRA exemption, resulting in higher taxes.
- Keep these documents handy for future reference, especially when filing your income tax return.
Disclaimer: This information is intended for general purposes only and does not constitute tax advice. Please consult a qualified tax professional for specific guidance based on your individual circumstances.
