House Rent Allowance is a major portion of your salary. It is provided to the employees by an employer or company to enable them to bear the expenses incurred on house rent. The following are the conditions by which an employee’s HRA will not be taxed, and let us also know how it can be calculated:

An employee can claim the deduction of HRA under Section 10(13A) of the Income Tax Act of 1961, provided:

• The employee is an employed person.
• He or she receives HRA as a component of his or her salary.
• The employee resides in a rented house.
• The employee actually pays the rent; that is to say, the rent receipt must be issued in his or her name.

How the House Rent Allowance is calculated:

An HRA can be calculated with the help of the following:

• The amount paid for the actual rent deducted from the 10% of the basic salary
• The actual HRA offered by the employer or company, or
• 50% of the salary when the rented accommodation is situated in any of the metropolitan cities, viz., Delhi, Mumbai, Chennai, or Kolkata, and 40% of the salary if it is situated in any other city.

Note: Salary includes Basic Salary, Dearness Allowance (DA), and other commissions, if these are applicable to calculating HRA.

Illustration: Mr. SK is an employed person and resides in a rented house. His monthly rent is Rs. 16,000, and he receives HRA at Rs. 20,000. Now, it is to be understood that he can claim how much tax deduction.

His salary slip shows the following salary components:

So, in this case, he can claim the tax deduction, which will be the least of the following:

• The actual rent paid minus 10% of the basic salary = Rs. 16,000 minus Rs. 2400 = Rs. 13,600.
• The actual rent paid by the employer is Rs. 20,000.
• 50% of the basic salary = 50% of Rs. 24,000 = Rs. 12,000 (assuming that Mr. SK is residing in a metropolitan city).

The points that must be considered while claiming the HRA deduction are the following:

• If the employee is paying the yearly rent of more than 1 lakh rupees, then he or she will need to produce the PAN card of the landlord to claim the HRA deduction. If the landlord doesn’t have a PAN card, then the employee will have to submit a declaration duly signed by him or her. However, if none of these are available, then the employee will not get the benefit of the HRA deduction.
• If the employee is provided rented accommodation by the employer but is still staying with his or her parents, then he or she will have to enter into a rental agreement with his or her parents. In that case, the employee can claim the HRA deduction by submitting the rent receipt issued in the name of the employee's parents. However, while filing their income tax return, the parents will have to add the same rental income to their income. Thus, the things that are a must to avail of the HRA deduction in this case are the rental agreement and the amount of the rent that has been transferred (ideally via bank transfer).
• The HRA is available to complete the expenditure incurred on the rent. Therefore, this allowance will not be available to the employee if he or she is living in his or her own house.
• If the employee-assesse pays the rent for his or her spouse, then he or she cannot claim the HRA deduction.
• An employee can claim interest paid on a home loan for both HRA and interest paid on a home loan under sections 10(13A) and 24B. For example, X has taken a home loan for under-construction property and lives in a rented house presently. So, in this case, X can claim a tax deduction for both home loan interest and HRA, so as to reduce his or her total taxable income.

How an employee can save tax under Section 80GG if he or she doesn’t receive HRA:

If an employee is living in a rented house but is not receiving the HRA or is not employed and doesn’t receive the salary, then how should he or she save the tax? If this is the case, one need not panic. One can still claim a deduction under Section 80GG.

An employee can claim the maximum of the following deduction under Section 80GG:

• 5000 per month, Rs. 60,000 per annum,
• 25% of the employee’s gross income or
• Actual Rent Paid: 10% of Actual Rent