Employees are provided with HRA to offset / balance living costs, depending on the city / region in which they live. Living costs in a particular city / region can be higher or lower than other cities / regions of the country depending on various factors such as taxes, food prices, grocery costs and house rentals.
Employees staying in rented houses may demand HRA to get their taxable income reduced. HRA can be partly or entirely tax-free. The HRA is for lodging related expenses.
This allowance is entirely taxable for workers, who do not live in leased dwellings. If you live in a house that you own, you might be considering getting some relief on the interest and principal payments in respect of home loan installments.
The estimation of HRA depends on the following four factors: the employee's salary The HRA part of the salary The rent charged by the employee The position (city) of the rented residence Rules of exemption The HRA tax exemption is equal to the lowest of the following four amounts: Real HRA earned Real rent paid decreased by 10 per cent of the salary 50 per cent of the salary. Hence the percentage of exemptions for metro cities is higher.
Related Post: Summary of Common Allowances Because the lowest of the above four sums would be excluded from tax, the employee can ask his / her employer to restructure the pay in order to receive full tax benefit.
Example: HRA Sam is estimated living in Bengaluru and earns a basic salary of INR 50,000 pm. His salary's HRA part is INR 20,000 but the actual rent that he pays is INR 10,000. How much waiver does he get?
To address this question, look at the factors that affect HRA calculation to get the lowest amount: Actual HRA earned is (INR 20,000 x 12) = INR 2,40,000 Actual rent paid (INR 10,000 x 12) – 10 per cent of salary [(INR 50,000 x 12) x 10 per cent] = INR 60,000 40 per cent of basic salary (as Bengaluru is a non-metro town) = [(INR 50,000 x 12) x 40 per cent] = INR 2,40,000 INR 60,000 is = INR 2,40,000 INR 60,000. Therefore Sam will earn an allowance of INR 60,000 on HRA.
FAQs about HRA 1. Will an employee get tax benefits on HRA along with home loan tax benefits?
Hey. Employees will jointly claim the two tax exemptions. If an employee is a householder who pays home loan but lives in a rented accommodation, then for both cases he / she may receive tax benefits.
Below are the various situations where an employee may claim HRA: living in his / her own house: in this situation, he / she can not demand an exemption from HRA. All portion of HRA will be taxable.
Employee owns a house in City A but remains on rent in City B: he / she can demand an exemption from HRA in such a case.
Employee's own house is under construction and is currently being rented in the same city: in this case, he / she can demand an exemption from HRA.
The employee's house is located in City A and is leased in the same city: the employee may demand an exemption from HRA provided he / she can show that the own house is far from the workplace. In this case, he / she can assert tax advantages on both the home loan and the HRA portion. Also, if the employee has leased his own home, he / she will report rental income in his / her returns on income tax. If the house itself is empty however, then the employee will claim notional rent.
2. To say HRA, who does rent to an employee?
If an employee pays rent to his / her landlord (owner of the property) where the employee resides, HRA benefits can be reported. The owner can however be anyone including the parents, relatives or friends of the employee.
There should be a legally binding rental agreement between the householder and the employee and evidence that the employee is paying the correct rent to the landlord every month should be available.
3. Is PAN mandatory for the landlord to say HRA?
Yeah, if the employee's rent is higher than INR 1 lakh p.a., then listing the landlord's PAN number in the rental agreement is mandatory to claim tax exemption on HRA.
4. When an employer refuses to pay the wage with HRA, will the employee still claim the applicable tax deduction?
Indeed, Section 80GG of the Income Tax Act requires the employee living on rent to be tax deductible even though he / she does not seek HRA from his employer.
Related post: LTA-Do you have any more questions about HRA through a magnifying glass? Please post them in the Comments section and we will get back to you soon.
Employees staying in rented houses may demand HRA to get their taxable income reduced. HRA can be partly or entirely tax-free. The HRA is for lodging related expenses.
This allowance is entirely taxable for workers, who do not live in leased dwellings. If you live in a house that you own, you might be considering getting some relief on the interest and principal payments in respect of home loan installments.
The estimation of HRA depends on the following four factors: the employee's salary The HRA part of the salary The rent charged by the employee The position (city) of the rented residence Rules of exemption The HRA tax exemption is equal to the lowest of the following four amounts: Real HRA earned Real rent paid decreased by 10 per cent of the salary 50 per cent of the salary. Hence the percentage of exemptions for metro cities is higher.
Related Post: Summary of Common Allowances Because the lowest of the above four sums would be excluded from tax, the employee can ask his / her employer to restructure the pay in order to receive full tax benefit.
Example: HRA Sam is estimated living in Bengaluru and earns a basic salary of INR 50,000 pm. His salary's HRA part is INR 20,000 but the actual rent that he pays is INR 10,000. How much waiver does he get?
To address this question, look at the factors that affect HRA calculation to get the lowest amount: Actual HRA earned is (INR 20,000 x 12) = INR 2,40,000 Actual rent paid (INR 10,000 x 12) – 10 per cent of salary [(INR 50,000 x 12) x 10 per cent] = INR 60,000 40 per cent of basic salary (as Bengaluru is a non-metro town) = [(INR 50,000 x 12) x 40 per cent] = INR 2,40,000 INR 60,000 is = INR 2,40,000 INR 60,000. Therefore Sam will earn an allowance of INR 60,000 on HRA.
FAQs about HRA 1. Will an employee get tax benefits on HRA along with home loan tax benefits?
Hey. Employees will jointly claim the two tax exemptions. If an employee is a householder who pays home loan but lives in a rented accommodation, then for both cases he / she may receive tax benefits.
Below are the various situations where an employee may claim HRA: living in his / her own house: in this situation, he / she can not demand an exemption from HRA. All portion of HRA will be taxable.
Employee owns a house in City A but remains on rent in City B: he / she can demand an exemption from HRA in such a case.
Employee's own house is under construction and is currently being rented in the same city: in this case, he / she can demand an exemption from HRA.
The employee's house is located in City A and is leased in the same city: the employee may demand an exemption from HRA provided he / she can show that the own house is far from the workplace. In this case, he / she can assert tax advantages on both the home loan and the HRA portion. Also, if the employee has leased his own home, he / she will report rental income in his / her returns on income tax. If the house itself is empty however, then the employee will claim notional rent.
2. To say HRA, who does rent to an employee?
If an employee pays rent to his / her landlord (owner of the property) where the employee resides, HRA benefits can be reported. The owner can however be anyone including the parents, relatives or friends of the employee.
There should be a legally binding rental agreement between the householder and the employee and evidence that the employee is paying the correct rent to the landlord every month should be available.
3. Is PAN mandatory for the landlord to say HRA?
Yeah, if the employee's rent is higher than INR 1 lakh p.a., then listing the landlord's PAN number in the rental agreement is mandatory to claim tax exemption on HRA.
4. When an employer refuses to pay the wage with HRA, will the employee still claim the applicable tax deduction?
Indeed, Section 80GG of the Income Tax Act requires the employee living on rent to be tax deductible even though he / she does not seek HRA from his employer.
Related post: LTA-Do you have any more questions about HRA through a magnifying glass? Please post them in the Comments section and we will get back to you soon.