House Rent Allowance (HRA) is a critical component of an employee’s salary, providing tax benefits for the rent paid. However, it is not allowed under the new tax regime. Let’s delve into how to calculate exempt HRA, the documents required to claim it, and the implications if HRA is not part of your salary structure.
How to Calculate Exempt HRA?
To calculate the exempt portion of HRA, you need to consider the least of the following:
- HRA Received
- 40% of Salary (Non-Metro City) / 50% of Salary (Metro City): Metro cities include Delhi, Mumbai, Chennai, and Kolkata. Salary refers to Basic salary plus Dearness Allowance (DA).
- Rent Paid minus 10% of Salary.
For example, if you are working in a metro city with a basic salary and DA totaling INR 50,000 per month, and you pay INR 20,000 as rent, the exempt HRA would be the least of:
- HRA received
- 50% of salary: INR 25,000
- Rent paid minus 10% of salary: INR 20,000 – INR 5,000 = INR 15,000
Documents to Claim HRA
To claim HRA, ensure you have the following documents:
- HRA Component in Salary: Your salary slip and Form 16 should reflect HRA.
- Rent Receipts: Make rent payments via bank transactions and keep the rent receipts.
- Rent Agreement: Maintain a formal rent agreement.
- PAN of Landlord: Required if the annual rent exceeds INR 1,00,000. For monthly rent above INR 50,000, a TDS of 5% under section 194-IB is applicable.
What If HRA Is Not Part of Your Salary Structure?
If you pay rent but HRA is not included in your salary, you cannot claim HRA. However, you can claim a deduction under section 80GG. The deduction is the least of the:
- INR 5,000 per month
- 25% of total income (excluding capital gains and specific deductions)
- Actual rent paid minus 10% of total income
To claim this deduction:
- File Form 10BA
- Keep rent receipts and PAN of the landlord
- Note that this deduction is not allowed under the new tax regime
Understanding House Rent Allowance (HRA) and its calculation is essential for optimizing your tax savings. Ensure you maintain the necessary documents and follow the process to claim HRA effectively. If HRA is not part of your salary structure, explore section 80GG for potential deductions. Always stay informed and consult with a tax professional for personalized advice.