Effectively managing finances involves exploring tax-saving avenues, and one such important aspect is understanding House Rent Allowance (HRA). In India, individuals have a plethora of tax-saving options to streamline financial planning and reduce tax liabilities. These include investments in Public Provident Fund (PPF), insurance plans, tax-saving fixed deposits, Equity Linked Savings Schemes (ELSS), National Savings Certificate (NSC), and contributions to the Employee Provident Fund (EPF). Additionally, deductions under Section 80C of the Income Tax Act cover expenses like life insurance premiums and tuition fees.
Furthermore, homeowners can capitalise on their property by leveraging home loans for tax benefits, with principal repayments and interest payments qualifying for deductions under Section 80C and Section 24(b) respectively. This strategic utilisation not only meets housing needs but also results in significant tax savings.
If you are considering homeownership as part of your comprehensive financial strategy, exploring home loan options can provide both a tangible asset and additional tax benefits. Bajaj Finserv offers home loans with competitive interest rates starting from 7.99%* p.a. and flexible repayment tenures up to 32 years. Check your home loan eligibility and discover attractive offers tailored to your financial profile. You may already be eligible, find out by entering your mobile number and OTP.
What is HRA?
House Rent Allowance, commonly known as HRA, is a key part of many employees’ salary packages, especially for those living in rented homes. It is a payment given by employers to help employees manage their monthly rent expenses. HRA is also useful for reducing income tax under Section 10(13A) and Rule 2A of the Income Tax Act, 1961. However, you can only claim this benefit if you are actually staying in a rented house. Let us now explore who can apply, how to calculate HRA, and more.
Who can avail of HRA?
HRA is only available to people who earn a salary and receive an HRA component as part of their total pay. If you are living in a rented property, you may claim tax benefits on your HRA amount. This exemption helps you lower your taxable income. However, HRA is not available for self-employed individuals or business owners. They cannot claim HRA even if they live in a rented house. If you meet the eligibility, you can enjoy both financial and tax-saving benefits through your HRA.
HRA calculation methods
Calculating HRA involves several methods, each with its own set of conditions and considerations. The commonly used methods include:
- Actual HRA received: This method involves calculating the actual amount of HRA received from the employer. The least of the following amounts are considered for deduction: actual HRA received 50% of salary for those residing in metro cities or 40% for non-metro cities, and the excess of rent paid over 10% of salary.
- Rent paid minus 10% of salary: Under this method, the difference between the rent paid and 10% of the salary is considered for HRA deduction. The least of the following amounts are deductible: rent paid minus 10% of salary, actual HRA received, or 50% of salary for metro cities and 40% for non-metro cities.
- 50% of salary: In this method, 50% of the individual's salary is considered for HRA deduction, provided they reside in metro cities. For non-metro cities, the percentage is reduced to 40%.
HRA calculation example
Let us take the case of Mr. Chowdhury, who works in Delhi and pays a monthly rent of Rs. 12,000. His basic salary is Rs. 40,000 and he gets Rs. 18,000 as monthly HRA. The annual HRA calculation is as follows:
Particulars |
HRA calculation |
Yearly amount (Rs.) |
Actual HRA received |
18,000 × 12 |
2,16,000 |
Rent paid – 10% of basic salary |
(12,000 × 12) – 10% of (40,000 × 12) |
96,000 |
50% of basic salary (metro city) |
50% of (40,000 × 12) |
2,40,000 |
Mr. Chauhan can claim Rs.96,000 as HRA exemption since that is the lowest of the three values.
While HRA provides excellent tax savings for renters, transitioning to homeownership can offer even greater long-term financial benefits through property appreciation and substantial tax deductions on home loans. With Bajaj Finserv offering amounts up to Rs. 15 crore* and processing approvals within 48 hours*, you could move from paying rent to building equity in your own property. Check your loan eligibility to explore homeownership opportunities that align with your current rental budget. You may already be eligible, find out by entering your mobile number and OTP.
Eligibility criteria for HRA
To claim HRA benefits, certain eligibility criteria must be met:
- The individual must be a salaried employee receiving HRA as part of their salary package.
- They must pay rent for accommodation where they reside.
- If the rent paid exceeds a certain threshold, the landlord's PAN details must be provided.
- HRA cannot be claimed if the individual resides in a self-owned property.
- Rent receipts and other relevant documents must be maintained as proof of rent paid.
HRA for the self-employed
Self-employed individuals cannot claim HRA under Section 10(13A). However, they may still receive tax deductions for rent payments through Section 80GG. This section is specifically designed to help those who are not salaried but still pay rent for staying in a rented house or flat.
HRA for salaried individuals
If you are a salaried individual who receives HRA as part of your pay package, you may claim tax exemption under Section 10(13A) and Rule 2A of the Income Tax Act. The exemption depends on your salary, rent paid, and whether your city is categorised as metro or non-metro.
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How to claim HRA exemption
To claim exemption on your HRA, you must meet the following conditions:
- You must live in a rented house or flat
- You must receive HRA as part of your salary
- You must provide proper rent receipts and bank proof of payments
HRA exemption is not a fixed amount—it is calculated using several factors like your basic salary, actual HRA received, rent paid, and whether your city of residence is a metro or non-metro area. Keeping proper documents and proofs is key for claiming this tax relief successfully.
Documents required for claiming HRA
To avail of HRA benefits, individuals need to provide certain documents, including:
- Rent receipts as proof of rent paid.
- Lease agreement or rent agreement with the landlord.
- PAN card details of the landlord if the annual rent exceeds a specified limit.
- Salary slips reflecting the HRA component.
HRA exemption rules and limits
Under Section 10(13A) of the Income Tax Act, HRA benefits are exempt from tax up to a certain limit. The exemption is calculated as the minimum of the following amounts:
- Actual HRA received.
- 50% of salary for those residing in metro cities or 40% for non-metro cities.
- The excess of rent paid over 10% of salary.
Impact of HRA on taxation
The presence of HRA in salary structures can significantly impact an individual's tax liability. By claiming HRA benefits, individuals can reduce their taxable income, thereby lowering their overall tax burden. However, it is essential to understand the intricacies of HRA calculation and the eligibility criteria to maximise tax savings effectively.
Leveraging home loans for tax savings
In addition to HRA, home loans also offer significant tax benefits. Principal repayments qualify for deductions under Section 80C, while interest payments are eligible for deductions under Section 24(b) of the Income Tax Act. By strategically utilising home loans, individuals can not only fulfil their housing aspirations but also enjoy substantial tax savings, ensuring a financially sound future.
Conditions for claiming HRA exemption
If you want to claim HRA exemption, the rent you pay must go to a landlord. If you do not pay rent during any part of the year, you cannot claim HRA for that period.
If your job shifts you from a metro city to a non-metro area (or vice versa), or if there is a change in your salary, your HRA exemption amount will be recalculated each month. This means the exemption can vary depending on when and how your job or rent conditions change.
You can pay rent to family members, but not to your father, to claim HRA benefits. However, you must pay the rent regularly every month, preferably via bank transfer, so that the Income Tax Department has clear proof of the transaction.
Make sure to keep rent receipts, your landlord’s PAN details (if rent exceeds Rs.1 lakh per year), and evidence of payments. These documents are necessary to avoid issues while claiming HRA exemption.
Always inform your employer on time so that the right deduction is made from your taxable salary. This helps you make the most of your HRA benefits.
When the house rent amount exceeds Rs.1 lakh
If you pay more than Rs.1 lakh in rent over a financial year, you must provide some extra documents to claim HRA. Along with your rent receipts, you will need to share the Permanent Account Number (PAN) of your landlord.
This is a rule set by the Income Tax Department to prevent false claims. Keeping digital or printed rent receipts and making payments through bank transfers can make the process smoother. Always ensure that these documents are submitted to your employer in time to avoid missing out on your eligible tax deductions.
Ways to save tax other than HRA
Besides HRA, there are several other ways to reduce your tax liability under the Income Tax Act, 1961. The most popular is Section 80C, which allows deductions up to Rs.1.5 lakh. You can claim benefits for investments and expenses like life insurance premiums, provident fund contributions, tuition fees, and more.
These tax-saving tools not only reduce your taxes but also help you achieve long-term goals. For example, insurance ensures that your family is financially safe if something unfortunate happens to you. Depending on the product, your family can receive a lump sum or regular monthly payments.
By planning well, you can enjoy both protection and tax savings. Other sections like 80D (for health insurance) and 80E (for education loans) also offer useful deductions. So, even if you do not qualify for HRA, there are many other ways to reduce your taxable income legally and smartly.
Among all tax-saving strategies, investing in a home through a housing loan offers some of the most substantial benefits, combining Sections 80C and 24(b) deductions that can save significantly more than HRA exemptions. Bajaj Finserv can help you make homeownership an achievable goal while maximising your tax savings potential. Check your eligibility for a home loan that could offer better tax benefits than your current HRA claims. You may already be eligible, find out by entering your mobile number and OTP.
Conclusion
House Rent Allowance is a valuable benefit that helps salaried employees manage rent costs while saving on taxes. Understanding how it works and the conditions involved can help you make better financial decisions. If you are planning to buy your own home instead of paying rent, a home loan from Bajaj Finserv can be a smart next step. With flexible tenors of up to 32 years and attractive rates starting at 7.99%* p.a., owning a house becomes more achievable – providing both comfort and long-term financial stability. You might already be eligible for a substantial amount of up to Rs. 15 crore* - check your home loan offers now by entering your mobile number and completing the OTP-verification.
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