Receiving HRA? Rent a house to save Income Tax

With the cascading cost of living, renting an accommodation is a major financial outflow for an individual. However, the same rented accommodation can help save some tax for salaried employees. In current salary packages, employees receive house rent allowance (HRA) to meet the cost of renting an accommodation. A salaried employee staying in a rented house can claim a tax exemption towards the HRA received, subject to the limits specified in this regard.

HRA exemption

The tax exemption is limited to the least of-

i) Actual HRA received

ii) 50% of the basic salary (if staying in Mumbai, Delhi, Kolkata, Chennai) else 40%

iii) Actual rent paid less 10% of basic salary.

For example, A lives in Mumbai and pays a rent of Rs 1,50,000 per annum. He receives a basic salary of Rs 6,00,000 per annum and an HRA of Rs 2,50,000 per annum. Here, tax exemption on rent would be calculated as follows:-

* HRA received: Rs 2,50,000

* 50% of basic salary: Rs 3,00,000

* Rent paid less 10% of basic salary: Rs 90,000

Of the above values, Rs 90,000 is the least and hence the balance Rs 1,60,000 is taxable. If A has no rent outflow, he will have to pay tax on full allowance of Rs 2,50,000. Also, tax exemption can be claimed only where HRA is part of the salary package. Depending on the amount paid as rent and HRA received, tax exemption can be claimed. If A receives HRA for the period during which he did not rent an accommodation, then no exemption can be claimed.

Documents required

The monthly rental receipts and rent agreement should be produced to the employer so that an exemption can be considered at the time of deducting tax on salary income. If one is unable to do so, he/she could claim the exemption while filing the tax return and seek a refund. The rent receipts act as proof of payment of rent and should, therefore, be preserved.

HRA and housing loan exemption

A general perception prevails that a person owning a house cannot claim an HRA benefit. However, this can be dispelled in a situation where one owns a house but, due to some genuine reason (like proximity from office to home), has to live in a rented accommodation. In this case he/she can claim a tax deduction for both HRA and housing loan. Of course, this is not a general rule and facts have to be examined for each case.

HRA under DTC

There are no tax-exempt HRA limits in the upcoming DTC. Therefore, those renting an accommodation may no longer be able to avail of this exemption. Considering that this exemption is a respite for the salaried class paying rent, we can only hope that this benefit is not done away with in the final draft of DTC