House rent allowance or HRA is commonly received if you are a salaried employee living in a rented house. The employer gives this benefit to the employee to reduce the tax burden on the employee. The quantum of house rent allowance to be paid depends on various factors such as the city of residence, the salary of the employee, etc.
The basic concept behind providing a house rent allowance to employees is to help them cope with the expenses. The rent paid by the employee is thus exempt from tax under the Income Tax Act, of 1961.
Employees can easily perform the HRA calculation online using the HRA calculator.
Eligibility to claim HRA Exemption
The house rent allowance benefit under the Income Tax Act, 1961 can be availed if you comply with the following conditions:
1. You are a salaried individual
2. You are a self-employed individual
3. HRA forms a part of your salary
4. You stay in rented accommodation
5. The exemption can be claimed if you have availed of a home loan
However, the exemption cannot be claimed if you
1. Are paying rent to your spouse
2. Are living in a self-occupied property
3. Do not have a valid rent receipt
4. Own a property in the same city
Calculation of HRA exemption
The tax benefits from HRA can be availed by people who are paying rent. Assesses prefer performing HRA calculations online using the HRA calculator. The sum deducted from the tax is the least of the following factors:
1. Actual HRA received
2. 50% of the basic salary for metro cities and 40% for other cities
3. Actual rent paid less 10% of salary
The basic salary is taken as basic salary plus the dearness allowance.
No Exemption if switching to New Scheme
With every assessment year, there is an option for a salaried employee to opt for either the new scheme of taxation or continue with the old one. If the individual opts for a new scheme, they lose out on the opportunity to claim the exemption of house rent allowance (HRA). Thus no exemption will be available for the FY 2021-22 if the individual has opted for the new scheme.
Tax Saving on HRA
Let us take two examples to observe how tax is saved on HRA by opting for the old regime of taxation.
In one of the examples, the individual does not take the benefit of HRA and in the other one, the individual does take the benefit of HRA.
Dearness allowance forms a part of salary
If we consider the HRA and actual rent paid to be equal, an individual who is not a senior citizen can save up to Rs. 26,000 that amounts to approximately 3% of the total income.
House rent allowance forms an integral part of the salary package and thus can be utilised successfully to save tax for an individual in a respective assessment year. The HRA calculator gives a precise calculation of the HRA that is exempt and the HRA taxable for any individual. A record of all the banking transactions and rent paid to the landlord should be maintained by the assessee.