BackDYK: How much HRA you are eligible for?
In order to claim HRA, you are required to furnish proof of rent paid to your employer
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For most employees, this is the time when employers ask to furnish proofs of investments and expenses that qualifies for tax deductions. Income-tax Act allows you to make claim for investments in certain instruments—such as Public Provident Fund, National Savings Certificate, equity-linked savings schemes, insurance premiums and so on. Expenses such as tuition fees, interest on home and education loans and house rent paid by employees are also tax exempt. While most investments and expenses are considered on an accrual basis, calculation of claim or deduction for those employees living on rent is a little complex. Let’s see how much house rent allowance (HRA) you can claim.
How to calculate HRA?
HRA is eligible for tax exemption under section 10(13A) of the Income-tax Act, provided your salary structure includes this provision. To determine how much of HRA you are eligible for, you will have to carry out three calculations and minimum of these three calculations will be allowed to be claimed as HRA deduction. First, actual HRA received from the employer. Second 50% of your salary if you are living in a metro city such as New Delhi, Mumbai, Kolkata or Chennai or 40% of your salary if you are living in any other city. Third, actual rent paid minus 10% of your salary. Here your salary includes your basic salary along with dearness allowance (if part of retirement benefit) and turnover based commission, if any.
For instance: Let us assume your basic salary is 60,000 and you also get dearness allowance of 10,000. You are entitled to claim 35,000 as HRA by your employer. You live with your family on rent in New Delhi and pay 30,000 per month as rent. In this case your HRA would be the lower of 35,000 (actual HRA received), 35,000 (50% of your salary) or 23,000 (actual rent paid minus 10% of salary including basic salary and dearness allowance, i.e. 7,000). Therefore, here only 23,000 per month will be allowed as HRA for tax exemption.
Things to note
In order to claim HRA, you are required to furnish proof of rent paid to your employer. However, in case you are paying a rent of less than 3,000, you may not be required to furnish rent receipts to your employer.
Moreover, after a circular by the Central Board of Direct Taxes (CBDT) in October 2013, it has become mandatory for an employee to report Permanent Account Number (PAN) of the landlord to the employer if rent paid is more than 1 lakh per annum. According to the CBDT, in case the landlord does not have a PAN, a declaration to this effect from the landlord should be filed by the employee. Make sure the declaration clearly mentions the landlord’s name, property address and rent paid by you.
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