Are you confused about how House Rent Allowance (HRA) works and whether you are eligible for it? HRA is a salary component provided by an employer to help employees cover their rental expenses, and it can be a useful way to save on taxes. In this blog, we will explore 6 important facts about HRA that you must know. We will cover topics such as how the tax exemption on HRA is calculated, whether you can claim tax benefits on rental expenses if you don’t receive HRA as part of your salary, and how HRA compares to a housing loan. By the end of this blog, you will have a better understanding of HRA and how it can benefit you.
What is House Rent Allowance (HRA)?
HRA is a salary component provided by an employer to help employees cover their rental expenses. It is a fixed amount of money that is paid to the employee in addition to their regular salary, and it is meant to offset the cost of renting a house or apartment.
How is the tax exemption on HRA calculated?
The tax exemption on HRA is calculated based on the least of the following:
- Actual HRA received
- 40% of basic salary (50% for residents of Mumbai, Kolkata, and Delhi)
- Rent paid minus 10% of basic salary
For example, let’s say an employee has a basic salary of INR 50,000 per month and receives INR 30,000 as HRA. They also pay INR 20,000 per month in rent. In this case, the tax exemption on HRA would be calculated as follows:
- Actual HRA received: INR 30,000
- 40% of basic salary: INR 50,000 x 40% = INR 20,000
- Rent paid minus 10% of basic salary: INR 20,000 – (INR 50,000 x 10%) = INR 15,000
The tax exemption on HRA in this case would be INR 15,000, which is the least of the three amounts.
How to Apply for HRA
- To apply for HRA, you will need to provide proof of your rental expenses, such as a copy of your rent agreement and receipts for rent paid.
- Your employer will then calculate the amount of HRA that you are eligible for based on your salary and rental expenses.
- The HRA will be included in your salary and will be tax-exempt up to the calculated amount.
Can I claim tax benefits on rental expenses if I don’t receive HRA as part of my salary?
If an employee does not receive HRA as part of their salary, they can still claim tax benefits on rental expenses under the “House Property” section of their tax return. To claim the tax benefit, the employee must furnish proof of paying rent, such as a rent receipt or rent agreement. The tax benefit will be calculated based on the amount of rent paid minus 10% of the employee’s basic salary.
Is HRA applicable to individuals who own a house and don’t pay rent?
HRA is not applicable for individuals who own a house and do not pay rent. This is because the purpose of HRA is to offset the cost of renting a house, and it is not intended for individuals who own their own home.
How does Home Loan Vs HRA work?
I have got so many queries on Home Loan Vs HRA work. A home loan is used to finance the purchase of a house, while HRA is used to cover rental expenses. Interest paid on a home loan is tax-deductible under Section 24 of the Income Tax Act, while HRA is tax-exempt. The tax benefits of a home loan are only available if the loan is used to purchase a house that is self-occupied. If the house is rented out, the tax benefits will be limited.
Do I need to declare the ownership of my house in my tax return if I receive HRA from my employer?
Employees who own a house and receive HRA from their employer must declare the ownership of the house in their tax return to avoid any discrepancies. If the employee fails to declare the ownership of the house, they may end up claiming tax benefits on both HRA and the ownership of the house, which is not allowed under the Income Tax Act.
You Must Know 6 Facts About House Rent Allowance (HRA) – A complete Guide
- HRA is a salary component provided by an employer to help employees cover their rental expenses.
- The amount of HRA received is tax-exempt, provided the employee furnishes proof of paying rent.
- The tax exemption on HRA is calculated based on the least of the following:
- Actual HRA received
- 40% of basic salary (50% for residents of Mumbai, Kolkata, and Delhi)
- Rent paid minus 10% of basic salary
- If an employee does not receive HRA as part of their salary, they can still claim tax benefits on rental expenses under the “House Property” section of their tax return.
- HRA is not applicable for individuals who own a house and do not pay rent.
- Employees who own a house and receive HRA from their employer must declare the ownership of the house in their tax return to avoid any discrepancies.
Benefits of a Housing Loan
There are some benefits of housing loans which are mentioned below.
- A housing loan can help you finance the purchase of your dream home, which can be a great long-term investment.
- Interest paid on a housing loan is tax-deductible, which can help reduce your overall tax liability.
- Repaying a housing loan can also help improve your credit score, which can be beneficial in the future when you apply for other loans or credit cards.
Conclusion
HRA is a useful salary component for employees who pay rent, while a housing loan is a good option for those looking to purchase a house. It’s important to consider your personal circumstances and financial goals when deciding which option is best for you.
Written by Vivek Mourya
Legal Guide 