Understanding HRA in Income Tax: Eligibility, Taxation, and Benefits Explained

Individuals may believe that choosing a firm with outstanding perks is preferable if they wish to shift jobs. Welfare benefits come in many forms, but for the sake of this discussion, we’ll concentrate on “House Rent Allowance (HRA).”

Although housing allowance is a form of social benefit, employers are free to choose whether to offer it and under what circumstances, as there is no legal requirement to do so.

Employees value several advantages, including rent assistance (housing allowance).

If a rent subsidy is given as a social benefit, it might be written off as an expense. Many businesses appear to be doing this because it is advantageous to the business as well.

This page will describe the type of housing allowance system, how it is taxable, and how to be eligible for it.

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What is HRA in Income Tax, or Welfare Rent Subsidy?

A welfare benefit known as rent assistance (housing allowance) is provided to employees by their employer, who covers a portion of their housing costs.

As an illegal welfare benefit, businesses are free to create and carry out their regulations.

It is going to be necessary to help their everyday lives and bring stability into their lives since it is conceivable to address disparities among employees concerning housing expenses.

There is a precise distinction between a housing allowance and a rent subsidy.

When a business agrees to lease a house or hostel to an employee, it is known as a rent subsidy. The employee is in charge of securing housing and other benefits on their own, and the corporation strictly provides a financial allowance.

Although “rent subsidy” is one of the advantages listed above that might be classified as a welfare benefit (many businesses use the terms similarly), for this article, all housing-related costs and allowances shall be addressed as “rent subsidy (housing subsidy)”.

Additionally, keep in mind that housing allowances, also known as rent subsidies, are essentially payments linked to a home’s rent; as such, payments to homeowners are handled differently.

When an employee buys a house of their own, some employers provide benefits like mortgage assistance; however, this is not the same as the welfare benefit known as rent subsidy (housing allowance).

Housing allowances are taxable since they are considered salaries. The whole sum will be determined as employment earnings, and it must be subject to income tax.

Allowances given to executives and workers are typically regarded as pay income. To be more precise, salary income also includes housing allowance, household (based) allowance, area allowance, salary for overtime, leave pay, duty allowance, etc.

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What is the Median Amount Received in Housing Allowance or Rent Subsidies?

The average sum of housing allowance (rent assistance) paid varies based on the size of the business, the structure of the family, and the survey methodology.

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Who qualifies for HRA?

Only employees receiving a salary with an HRA component and living in rented accommodation can benefit from this tax advantage. Self-employed individuals are not eligible for HRA.

HRA for Self-Employed

Self-employed individuals cannot get HRA as per tax regulations. However, they can still claim tax deductions for rented housing under Section 80GG.

HRA for Salaried Employees

Salaried workers can claim exemptions for HRA under Section 10 (13A), rule number 2A of the Income Tax Act.

Buying or Renting a House?

The type of living may occasionally be a requirement for payment.

Employees residing in rental housing are qualified for payment if the kind of home is a condition.

The employee is frequently ineligible for benefits because they are not required to make payments, even if they are renting their parents’ house.

Furthermore, you are not eligible for welfare benefits like rent assistance (housing allowance) if you have a home because it appears as an asset.

Implementing welfare programs for home loans will need establishing guidelines that take equity with rent subsidies (housing allowance) into account.

When Restricted to Characteristics With a Significant Demand for Housing Allowance (Rent Assistance)

Reducing the differences in housing costs between employees is the primary goal of rent subsidies, often known as housing allowances.

Because of this, some businesses have set up requirements to ensure that workers who have a significant need for housing help (rent assistance) get paid first.

To be more precise, restrictions have been placed on the rent subsidy (housing allowance), including an upper age limit and a restriction on single recipients, to restrict the target to recent employees, who typically have lower wage levels. That appears to be the case.

Some employers provide cash rent subsidies such as relocation allowances and one individual assignment allowances—to workers who must pay extra for housing-related expenses because of job transfers, etc., even though they do not qualify for welfare benefits.

 

 

How to Get HRA Exemption?

Living in Rented Accommodation:

Firstly, you need to be living in a rented house or apartment to qualify for HRA exemption. If you own your home, you won’t be eligible.

Receiving HRA as Part of Salary:

Your employer must include HRA as part of your salary package. This is the allowance you can claim for exemption.

Provide Rent Receipts:

To claim HRA exemption, you must provide valid rent receipts and proof of rent payments to your employer.

Calculating HRA Exemption:

There are various factors involved in calculating HRA exemption:

Actual HRA Received:

The actual amount of HRA you receive from your employer.

Percentage of Salary:

For metro city residents, it’s usually 50% of your basic salary plus Dearness Allowance (DA). For non-metro residents, it’s usually 40%.

Actual Rent Paid:

The rent you actually pay for your accommodation.

Minus 10% of Salary:

10% of your basic salary plus DA is subtracted from the actual rent paid.

Claiming HRA and Home Loan Interest Deduction:

You can claim both HRA exemption and home loan interest deduction if:

You are living in a rented house while owning another house in the same city. You need to justify why you’re not living in your own house, like if it’s far from your workplace.

You have to move to another city for work, and you own a house in the previous city.

Landlord’s PAN Requirement:

If you pay rent of over Rs.1 lakh annually, you need to provide your landlord’s PAN to claim HRA exemption. If your landlord doesn’t have a PAN, they need to provide a self-declaration stating so.

TDS for Rent Paid to NRI Landlords:

If you’re paying rent to an NRI landlord, you must deduct TDS (Tax Deducted at Source) of 30% before making the payment.

Claiming HRA Without Receiving HRA:

If you’re not receiving HRA from your employer but are paying rent, you can still claim a deduction under Section 80GG. However, certain conditions apply:

You must be either self-employed or salaried.

You haven’t received HRA at any time during the year.

Your rent expenses exceed 10% of your total income.

You or your family don’t own any residential property where you reside.

If you own another property, it should not be claimed as self-occupied to claim the 80GG deduction.

Illustration:

Let’s consider an example:

Mr. Sharma lives in a rented house in Mumbai and receives an HRA of Rs.1 lakh annually from his employer. His basic salary plus DA is Rs.3,00,000 per year, and he pays Rs.20,000 per month as rent.

To calculate his HRA exemption, we find the lowest amount among:

Actual HRA received.

50% of basic salary plus DA.

Actual rent paid minus 10% of salary.

In this case, the entire HRA received would be exempt from income tax.

Claiming HRA While Living With Parents:

If you’re living with your parents but receive HRA from your employer, you can still claim the allowance. You need to:

Enter into a rental agreement with your parents.

Transfer rent money to them monthly, preferably via bank transfer.

Your parents should report the rent received as income in their tax return.

How to Claim Deduction Under Section 80GG?

Under Section 80GG, you can claim a deduction for rent paid if:

You don’t receive HRA from your employer.

The least of the following will be exempted from tax:

Rs.5,000 per month.

25% of adjusted total income.

Actual rent should be less than 10% of adjusted total income.

Adjusted total income is your total income minus certain deductions.

These steps simplify how to claim HRA exemption and deductions under Section 80GG for taxpayers.

 

 

FAQs:-

1. Who qualifies for HRA?
Only employees receiving a salary with an HRA component and living in rented accommodation can benefit from this tax advantage. Self-employed individuals are not eligible for HRA.

2. Can self-employed individuals claim HRA?
No, self-employed individuals cannot claim HRA. However, they can avail tax deductions for rented housing under Section 80GG.

3. Is HRA taxable?
Yes, HRA is taxable as it is considered part of your salary income and is subject to income tax.

4. What factors determine HRA exemption?
The factors include actual HRA received, percentage of salary, actual rent paid, and 10% of salary.

5. Can I claim both HRA and home loan interest deduction?
Yes, you can claim both HRA exemption and home loan interest deduction under certain conditions, such as owning a house in a different city from where you work.

6. Is providing the landlord’s PAN mandatory?
Yes, if your annual rent payment exceeds Rs.1 lakh, you must provide your landlord’s PAN to claim HRA exemption.

7. What if my landlord doesn’t have a PAN?
In such cases, your landlord needs to provide a self-declaration stating that they don’t have a PAN.

8. Can I claim HRA if I don’t receive it from my employer?
Yes, you can still claim a deduction under Section 80GG if you’re not receiving HRA but are paying rent.

9. How do I calculate HRA exemption?
HRA exemption is calculated based on the lowest of actual HRA received, 50% of salary (for metro residents), actual rent paid minus 10% of salary.

10. What is Section 80GG?
Section 80GG allows taxpayers not receiving HRA to claim a deduction for rent paid, subject to certain conditions and limits.