If you have rented an accommodation, your HRA can be partly or fully exempt from tax
Did you know that the HRA (house rent allowance) component of your salary can help you save taxes?
Section 10(13A) of the Income Tax Act covers the how and the how much of this tax benefit.
To claim HRA exemption, you must live in a rented residential accommodation, and pay rent for the same. If you stay in your own house, or in a house where you don’t pay rent, you cannot claim the exemption. Also, if you pay house rent to your spouse, this does not qualify for exemption. But you can claim exemption on rent paid to others including parents, brethren and in-laws.
If you rent the house for only part of the year, the HRA exemption is allowed only for that period. Say, you receive HRA for the entire financial year (April to March) but you rent a house only during October to March, you cannot claim exemption on the HRA received during April to September.
Also, you must actually pay the rent to claim the exemption. If rent is due but unpaid, the benefit of tax exemption on HRA is not available. Employers usually require proof of rent payment (receipts from the landlord) before adjusting the HRA tax exemption in the monthly tax calculation.
Limits and Calculation
There are restrictions on the tax benefit that can be claimed, so the entire HRA amount may not be exempt from tax. Exemption is limited to the lower of the following three amounts:
a) The HRA amount received
b) Rent paid in excess of 10 per cent of salary
c) 50 per cent of salary if you live in Mumbai/Delhi/Kolkata/Chennai or 40 per cent of salary if you reside in other cities. Salary here means the sum of Basic Pay and Dearness Allowance. See the accompanying table for an example.
If the rent paid by you does not exceed 10 per cent of your salary (Basic pay + Dearness Allowance), then you get no tax exemption on the HRA received.
For calculation purpose, only salary pertaining to periods in which accommodation was occupied and rent paid will be taken into account. Also, salary is calculated on ‘due’ basis. This means that if you receive salary arrears of earlier years or advance salary pertaining to future years, it will not be considered while calculating the tax exemption.