Most employees receive HRA as part of their salary. The intention is usually to meet cost of a rented accommodation that you may be living in.
In case you pay rent, a portion of the HRA may be exempt from tax for you. If you do not live in a rented house, the entire amount will taxed as part of your salary each month, at the applicable tax rates.
If you have to claim a deduction from HRA – you must live in a rented accommodation, there must be a rent agreement and you should be able to support the rent payment you make each month. You cannot pay rent to your spouse – however, you can enter into a rent agreement with your parents or children. If you enter into a rent agreement with your parents or children, make sure they are including rent receipts as part of their taxable income.
The deduction available is the minimum of the following amounts–
- HRA received – if you have stayed in rented accommodation for part of the year, consider HRA for only that part.
- 50% of your Basic Salary when you live in a rented place in Mumbai, Calcutta, Delhi or Chennai OR if you are in any other city 40% of your Basic Salary
- Rent paid less 10% of Basic Salary
Basic Salary includes dearness allowance, where applicable.
Mr A lives in Mumbai and gets Rs 50,000 as basic salary & Rs 20,000 as HRA. The rent paid by him for his house is Rs 18,000.
The amount exempt to be taxed from HRA will be minimum of these three:
- HRA received = Rs 20,000
- 50% of Basic since he lives in Mumbai = Rs 25,000
- Rent paid – 10% of Basic = Rs 18000 – Rs 5,000 = Rs 13,000
Therefore HRA exempt = Rs 13,000. And Rs 20,000 – Rs 13,000 = Rs 7,000 will form part of his Taxable Income on account of HRA.
Note that – in case you are claiming any other deduction for your house property – say towards a loan – HRA exemption has no impact on that. You are eligible to claim HRA deduction if you meet the conditions stated above.