HR tax exemption rules: House rent subsidy (HRA) is a common component of many employees' salary packages. Unlike basic salary, HRA is not fully taxable, subject to specific conditions outlined in Section 10(13A) of the Income Tax Act, 1961.
The HRA exemption reduces the taxable portion of an employee's income, thus offering a way to save taxes. However, it is essential to highlight that if the employee lives in his or her own property or does not pay rent, the HRA received becomes fully taxable.
Every year, workers must choose between the old and new tax regimes, unless they have business income. Changes were made to the income tax laws for the new regime from April 1, 2023. In addition to the changes in tax rates, the basic exemption limit has been increased to Rs 3 lakh. In addition, standard deductions for salaries and pension income have been introduced, and the surcharge rate has been reduced for income exceeding Rs 5 million. No other changes to income tax have been made for the financial year 2024-25.
Therefore, if someone chooses the new tax regime in the current financial year 2024-25, they cannot avail tax exemption for HRA. However, if you choose to old tax regime and receive HRA, they can claim tax exemption.

Who qualifies for the HRA tax exemption?

That tax benefit is only for salaried individuals who opt for the old tax regime, have an HRA component in their salary and reside in rented accommodation. Self-employed professionals are not entitled to this deduction.
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How much HRA is tax free?

Tax exemption for HRA is determined by a minimum of three factors:
i) Actual HRA received
ii) 50% of salary for metropolitan cities or 40% for non-metropolitan cities
iii) Excess annual income paid greater than 10% of annual salary
The calculation is based on the base salary and, if applicable, the Departmental Allowance (DA) and commissions received for sales revenue are also included. This benefit only applies during the period of occupation of the rented house.

Let's illustrate a tax exemption scenario for HRA:

Consider an individual with a monthly base salary of Rs 20,000, receiving an HRA of Rs 8,000 and paying Rs 10,000 rent for accommodation in a metropolitan city. The individual is subject to 20% tax rate (i.e. income between Rs 5 lakh and Rs 10 lakh) under the old tax regime.
To determine the HRA benefit, we calculate the minimum of the following amounts annually:
i) Actual HRA received = Rs 96,000 (Rs 8,000 x 12)
ii) 50% of salary (metropolitan city) = Rs 1,20,000 (50% of Rs 2,40,000 annual basic salary)
iii) Excess rent paid annually above 10% of annual salary = Rs 96,000 (Rs 1,20,000* – 10% of Rs 2,40,000)
*Rs 10,000 x 12 = Rs 1,20,000
From the above calculation, the actual HRA received by the individual, worth Rs 96,000, is the lowest value. Therefore, this amount is exempt from tax.

Documentation required to claim HRA tax exemption

To claim HRA exemptions, employees must provide their employer with rent receipts and the rental agreement with the landlord. Tax experts emphasize the need to have both documents to claim HRA tax exemption. Furthermore, if the annual rent exceeds Rs 1 lakh, the employee must provide the owner's PAN to the employer to avail the tax benefit.

Special cases for HRA tax exemption

Rent payments to relatives: If you are paying rent to your parents, spouse or family members, you can still claim tax relief under the HRA as long as you do not own the rental property. However, it is crucial to maintain documentary evidence to prove the authenticity of lease transactions. Keep records of bank transactions, rent receipts and rental contracts to support your claim. Failure to convince the tax authorities of the authenticity of these transactions may lead to the rejection of your HRA application.
There have been cases where HRA claims of salaried taxpayers have been rejected by the tax authorities due to doubts over the authenticity of the claims. Paying rent to your spouse can also face legal scrutiny, according to tax experts. Therefore, it is essential that wage earners maintain robust documentation to prove the legitimacy of their HRA tax exemption claims.
Occupying your own home in a different city: If you own a home that you rented while working in another city, you can benefit from the HRA tax exemption and deductions for home loan interest and principal repayment simultaneously.

For individuals without an HRA component in salary

Some employees may not have an HRA component in their salary and non-salaried individuals may also pay rent. In such cases, Section 80GG of the Income Tax Act provides assistance.
Individuals who pay rent for furnished or unfurnished accommodation can claim a deduction from the rent paid under Section 80GG as long as they do not receive HRA as part of their salary. This can be done by providing Form 10B, the ET report states. It is important to note that this deduction is only available under the old tax regime.
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Tax deduction available under section 80GG

Under Section 80GG, the lesser of the following amounts is available for tax exemption:
(i) Rent paid above 10% of total income
(ii) 25% of total income*
(iii) Rs. 5,000 per month
*Total income refers to total gross income minus long-term capital gains, short-term capital gains where Tax on securities transactions (STT) has been paid and deductions available under Sections 80C to 80U excluding Section 80GG.

Conditions for claiming deduction under Section 80GG

While claiming a tax deduction under Section 80GG, it is important to note that neither the individual, his/her spouse, minor child nor the Hindu Undivided Family (HUF) should own any accommodation. Furthermore, if an individual owns any residential property and receives rent from it, no deduction will be allowed.
However, if you own a rental home or work in another city, you can simultaneously benefit from home loan interest deductions and principal repayment as well as HRA. It is crucial to understand that this concurrent benefit is not available under Section 80GG.