House Rent Allowance (HRA) is a significant part of the salary for many employees, especially those living in rented accommodations. It provides tax benefits under Section 10(13A) of the Income Tax Act, 1961. Understanding how to claim HRA while filing ITR can lead to substantial tax savings, ensuring you make the most of your eligible deductions. Proper documentation and awareness of the exemption rules are crucial for maximising these benefits. By effectively managing your HRA claims and exploring additional tax-saving avenues, you can optimise your financial planning and secure a more favourable tax outcome.
Understanding HRA
HRA is an allowance paid by employers to employees for covering their rental accommodation expenses. It is partially or wholly exempt from taxes under specific conditions. The exemption is calculated based on the least of the following:
- Actual HRA received.
- 50% of salary (basic + DA) for those living in metro cities (40% for non-metro cities).
- Rent paid minus 10% of salary (basic + DA).
Eligibility criteria for claiming HRA
To claim HRA, you must:
- Be living in a rented accommodation.
- Be receiving HRA as part of your salary package.
- Be paying rent to a landlord and not owning the accommodation.
If these conditions are met, you can proceed to claim the HRA exemption while filing your ITR.
Steps to claim HRA while filing ITR
- Collect rent receipts and rental agreement: Ensure you have the rent receipts and a rental agreement as proof of rent payment. Rent receipts should include details such as the landlord’s name, address, rent amount, and payment date.
- Calculate HRA exemption: Use the least of the three criteria mentioned above to calculate your HRA exemption. This calculation helps determine how much of your HRA is exempt from tax.
- Verify Form 16: Your employer provides Form 16, which includes details of your salary, HRA received, and tax deducted at source (TDS). Verify the HRA amount in this form.
- Enter details in ITR Form: Choose the correct ITR form to file your returns. Salaried individuals can either select ITR 1 or ITR 2, depending on their income sources.
- Submit proof if necessary: If your employer hasn’t accounted for your HRA exemption, or if you are filing ITR independently, keep the rent receipts and rental agreement ready. The Income Tax Department may request these documents for verification.
Special cases in HRA claims
- Rent paid to family members: You can pay rent to your parents or siblings, provided they own the property. Ensure that the rental arrangement is genuine, with rent receipts and bank transactions as proof.
- Own house and claiming HRA: If you own a house in a different city and live in rented accommodation for work purposes, you can still claim HRA.
Home loan and HRA
If you have a home loan, you can claim both HRA and home loan interest deduction under Section 24(b) and principal repayment under Section 80C. This is beneficial if you have a house in one city but live in rented accommodation in another due to work.
For example, if you have taken a home loan from Bajaj Housing Finance and you work in a different city, you can claim HRA for your rented accommodation and simultaneously claim deductions for your home loan interest and principal repayment.
Benefits of home loans
A home loan offers various benefits:
- Tax deductions: Home loan borrowers can claim tax deductions under Section 80C for principal repayment and under Section 24(b) for interest payments.
- Investment in real estate: Investing in property can provide long-term financial security and appreciation in value.
- Capital gains benefits: Homeowners can benefit from favourable tax treatment on capital gains when they sell the property, especially if the property is held for more than two years, making it a long-term capital asset.
- Building credit history: Regular and timely repayments of a home loan can help build a strong credit history, improving your credit score and making it easier to obtain other forms of credit in the future.
Maximising tax savings
In addition to HRA and home loans, consider leveraging other financial products to enhance your tax savings and investment portfolio:
- National Pension System (NPS): Contributions to NPS qualify for additional tax deductions under Section 80CCD(1B) up to Rs. 50,000.
- Equity-Linked Savings Scheme (ELSS): Investments in ELSS mutual funds are eligible for tax deductions under Section 80C and have the potential for higher returns.
- Health insurance: Premiums paid for health insurance policies qualify for tax deductions under Section 80D.
- Public Provident Fund (PPF): Contributions to PPF accounts are eligible for deductions under Section 80C and offer tax-free returns.
Claiming HRA while filing your ITR requires careful documentation and accurate calculations. Ensure you maintain all necessary proofs and understand the exemptions applicable to your situation. By doing so, you can significantly reduce your tax liability.
Additionally, leveraging home loans, such as those offered by Bajaj Housing Finance, can provide dual tax benefits if you live in rented accommodation. Exploring other financial products like NPS, ELSS, health insurance, and PPF can further enhance your tax savings and secure your financial future.
Filing ITR with the right knowledge and documentation not only ensures compliance with tax laws but also maximises your savings. Make sure to stay updated with any changes in tax regulations to continue benefiting from these provisions.
