Salaried individuals that live in a rented house are eligible for tax benefits on their housing allowance. HRA or housing rent allowance is usually a component of an employee’s gross salary and can be used to lower taxes fully or partially under Section 10 (13A) of the ITA. The HRA exemption is deducted before arriving at your taxable income. Certain employers provide compulsory HRA as part of the gross salary break-up. If you live in your own house or live in a house where you do not pay rent, then the HRA component is fully taxable.
The HRA deduction amount is calculated on the lesser of the following:
- The total HRA amount
- 50% of the basic salary plus Dearness Allowance (DA) for people living in metro cities
- 40% of the basic salary plus DA for people living in non-metro cities
- Rent paid minus 10% of the basic salary plus DA
For example, assume that your basic salary in the city of Delhi is Rs 30,000 per month. Your employer provides you with a monthly HRA of Rs 12,500 and no dearness allowance, which is usually the case with most private companies. Now, 50% of your basic salary comes out to Rs 15,000 which is more than your HRA amount. Will you get a tax benefit on Rs 15,000? No, your HRA tax exemption will be applicable on the lesser of the two, which in this case is Rs 12,500 only.
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How to claim tax benefit on HRA?
Before starting the procedure for availing HRA related tax rebate, make sure that your rent documents are in place. You will need:
- The rent agreement
- Rent receipts
- Landlord’s PAN card (if the rent exceeds Rs 1,00,000 p.a.)
Once you have assimilated these documents, submit them with your company’s human resources department promptly. After submission, the tax rebate amount will be credited to your account by your employer. An employee can double-check the final rebate amount by referring to Form 16, provided by the employer at the end of each financial year.
In case you forget to submit your rent-related documents to your employer, fret not! You can also claim this tax benefit when filing your annual income tax return (ITR) using ITR-1 form on the e-filing website. The portion of HRA which is tax-exempted will have to be manually calculated and filled out by you, as part of your income tax refund. You will have to claim a refund because your employer would have assumed that the entire HRA component is taxable since you did not provide relevant documents proving otherwise. Use the simple formula given above to calculate the HRA refund you are eligible to receive. Do not fill incorrect information as that will lead to a penalty.
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