HRA Income Tax Saving Simplified

Each year January is the month, when most of the salaried employees get reminders from their HR team for submission of income tax proof. Most of the self employed people, on the other hand, are reminded about the same by their Chartered Accountants

This is the time when individual tax payers make last minute attempt to save whatever income tax they can. While you are doing your tax saving calculation, we will tell you about the important ways through which you can save maximum amount of tax.

House Rent Allowance is one of the most important tax saving tool that helps many people save significant amount of tax. However, most of the people get confused as how much they can save through HRA

Do not worry. In this blog, we explain to you the simplest way to calculate your tax saving through HRA, which will help you in managing your tax savings this year.

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City of residence

Before getting into calculation part first thing you need to understand is importance of city of residence.

The city of your residence matters because the quantum of HRA exemption allowed is linked to this.

If you are living in any of the four metro cities like Delhi, Mumbai, Kolkata or Chennai, the maximum HRA that is exempted is 50% of the sum of your basic salary and dearness allowance.

However, if you are living in any place other than these metro cities then the maximum HRA that is exempted is 40% of the sum of your basic salary and dearness allowance.

Next thing that we will need is to verifying your salary slip

HRA must on salary slip

Just by being a salaried employee and paying a rent does not automatically makes you eligible for the HRA exemption.

For being eligible for this income tax exemption the HRA must be a part of your salary.

To verify this you must look at your salary slip whether it clearly states the HRA amount on it.

Many people working on consultancy basis or on contract do not get HRA so they cannot claim this exemption.

The calculations

Now we can move on to understand as how much of your HRA actually is exempted from tax

Any amount that is written on your salary slip as HRA does not automatically qualify for full exemption as there is a method to calculate HRA exemption limit.

Let me now explain how it works. It is actually a three step process

Under the first step you need to keep the amount of HRA that you actually receive as part of your salary. It is subjected to maximum limit of 50% or 40% of basic salary plus DA based on your city or residence as I explained earlier.

For Instance if you are living in a metro city like Delhi then you can have 50% of your basic salary plus DA as HRA. So if you actually receive a higher amount, then you should calculate only the 50% as eligible amount under this step. In our case we have taken Rupees 1.8 lakh as HRA which is also equal to the maximum amount of 50% eligible based on city of residence.

In the second step you need to determine the actual rent paid by you. This does not include any maintenance charges or charges for electricity, water, security and other services. In our case we have taken the actual rent to be Rupees 12000 monthly which comes out to be Rupees 1.44 lakh annually.

In the third step you need to first find out 10% of your basic salary plus DA. In our case as the annual basic salary plus DA is Rupees 3.6 lakh therefore its 10% comes out to be Rupees 36000.

Now we have to deduct this amount from the actual rent to get the amount of rent paid in excess of 10% of your basic salary plus DA. In our case when we deduct Rupess 36000 from Rupess Rs 1.44 lakh we get the amount as Rupees 1.08 lakh.

The least amount among these three steps is the amount of HRA that is exempted from income tax.

So in our case among the three amounts of Rupees 1.8 lakh of HRA received, Rupees 1.44 lakh of actual rent paid and Rs 1.08 lakh as excess rent paid as more than 10% of your basic plus DA the least amount is Rupees 1.08 lakh.

Therefore your exempted HRA amount is Rupee 1.08 lakh. So you will have to pay income tax on remaining HRA amount of Rs 36000 as it will become part your taxable income.

The Documentation

Once you have determined your exempted HRA amount you would need to arrange the desired documents to claim your HRA exemption.

If you are paying less than or equal to Rs 3000 per month as rent then only a declaration from you about the same would be sufficient.

If you are paying a rent above Rupees 3000 per month but less than Rupees 8333 then you would need to submit at least quarterly rent receipts for each quarter.

In case you are paying a monthly rent above Rs 8333 that is more than Rupees 1 lakh in a year then besides at least quarterly rent receipts you would also need to get the copy of PAN of your landlord and submit it for claiming HRA exemption.

However, if you are paying a monthly rent which is more than Rs 50000 then you would need to deduct a TDS at the rate of 5% and submit it with tax authorities and get a challan for it. For claiming HRA exemption you would need to furnish this challan with all the rent receipts.

No HRA as salary

What if you do not receive HRA as part of your salary? You would not be eligible to claim the exemption from tax for paying your house rent under the section 10 (13A) of the income tax act.

There is a way

So is there a no way you can get some relief for paying house rent? The good news is that yes you have a way to get some tax relief under section 80GG of the income tax act. Under this you can claim a maximum HRA deduction upto Rupee 5000 per month or Rupees 60000 in a year.