House Rent Allowance is a component of your salary package. This allowance is given by an employer to an employee to meet the cost of renting an accommodation.

Over here, we explain in detail what HRA is all about.

When can you claim HRA?

You can claim HRA if you fulfill certain conditions:  

~ You have an HRA allowance as part of your salary package.

~ You are staying in a rented accommodation.

~ You are actually paying rent for the residential accommodation occupied by you.

~ The rent must exceed 10% of your salary. Salary, in this case, includes your basic component and the dearness allowance. 

If you satisfy these conditions, you are eligible to claim exemption on the HRA received by you. Which brings us to the next question.

How much can you claim?

HRA is exempt to the extent of the least of the following:

1) The actual amount of HRA received.

2) 40% of salary (basic component + dearness allowance). This increases to 50% if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata.

 3) Rent paid minus 10% of Salary (basic component + dearness allowance)

The least amount among the above three options is exempt from tax.

Let's work it out.

Assumptions

HRA per month = Rs 15,000

Basic monthly salary = Rs 30,000

Dearness Allowance = Nil

Monthly rent = Rs 12,000

Rental accommodation is in Mumbai.

Exemption

The exemption would be the least of the following:

1. Actual amount of HRA
Rs 15,000

2. 50% of salary (basic component + dearness allowance)
50% x (30,000 + 0)
Rs 15,000

3. Actual rent paid - 10% of salary (basic component + dearness allowance)
Rs 12,000 - [10% of (30,000 + 0)] = 12,000 - 3,000
Rs 9,000

Rs 9,000 being the least of the three amounts will be the exemption from HRA. The balance HRA of Rs 6,000 (15,000-9,000) is taxable.

Can you pay rent to your family?

A number of our readers write in and tell us they want to pay rent to their parents. Some even spoke of paying rent to their spouse. Can they then claim HRA?

Let's say you live with parents. If you want to pay rent to your parents -- who in this case are the landlords -- you should request the owner of the house (which will be one of your parents) to declare it in his/ her personal income tax return. This will prevent any litigation in the future.

Some individuals want to pay rent to their spouse.

When living with your spouse, you cannot claim HRA. The relationship between a husband and wife is not commercial in nature; a husband and wife are supposed to stay together.

So payment of rent to a spouse will not be accepted by the income tax authorities.

Get organised

Do keep all your rent receipts since it is the only proof that you are paying rent. HRA exemptions are only available on submission of rent receipts or the rent agreement.

However, if the HRA is upto Rs 3,000 per month, then receipts/ agreement is not mandatory.

So, if your HRA is Rs 4,500 and the rent you pay is Rs 3,000, then the rent receipts are needed. But, if the HRA is Rs 3,000 and rent is Rs 4,000, then rent receipts are not needed. But it is wise to still keep them because, at the time of assessment, the Income Tax Officer may demand the receipts/ agreement.

ADROIT is a Pune-based firm that specialises in providing domestic and international tax services to salaried individuals and professionals. They can be reached at tax@adroitservices.in