House Rent Allowance or HRA is a common component of the salary package offered to employees by their employers. It is provided to help employees with the expenses related to rented accommodation. HRA is partially exempted from income tax, and this exemption can be claimed by individuals while filing their income tax returns. However, calculating the HRA claims accurately can be confusing and tricky, especially for those not well-versed in tax laws and regulations.
To calculate HRA claims in income tax, it is essential to understand the criteria and rules laid down by the Income Tax Act under section 10(13A). The amount of HRA exemption depends on various factors such as the actual rent paid, the city of residence, and the basic salary. The calculation of HRA claims involves the comparison of three components – actual HRA received, actual rent paid, and 50% or 40% of the basic salary, depending on the city of residence.
It is crucial to calculate HRA claims accurately to avoid any legal implications or penalties. Employers generally provide a detailed salary breakup, including the HRA component, which makes it easier for employees to calculate their HRA claims. However, it is still important to understand the process thoroughly to ensure that one is not missing out on any exemption that they are eligible for.
In this article, we will provide a step-by-step guide on how to calculate HRA claims in income tax and help individuals make the most of the HRA exemption while filing their tax returns.
Step 1: Calculate the actual HRA received
The first step in calculating HRA claims is to determine the actual HRA received by the individual during the financial year. This information can be obtained from the employer’s salary slips or Form 16. The actual HRA received is the amount paid by the employer to the employee as HRA.
It is important to note that the entire amount of HRA received is not exempt from tax. Only a portion of the HRA is eligible for exemption under Section 10(13A) of the Income Tax Act.
Step 2: Determine The Actual Rent Paid
The next step is to determine the actual rent paid by the individual during the financial year. This includes the rent paid for the rented accommodation and other related expenses, such as maintenance charges, society fees, etc.
To claim the HRA exemption, it is essential to provide documentary proof of the rent paid, such as rent receipts or rental agreements. The rent receipts should contain details such as the name and address of the landlord, the amount of rent paid, the period for which it is paid, and the landlord’s signature.
Step 3: Calculate The Least Of The Three Components
The final step in calculating HRA claims is determining the least of the three components – actual HRA received, actual rent paid minus 10% of basic salary, and 50% or 40% of the basic salary, depending on the city of residence.
If the actual HRA received is less than the amount calculated using the above formula, then the entire HRA received is exempted from tax. However, the excess amount is taxable if the actual HRA received is more than that calculated using the above formula.
Step 4: Include The HRA Exemption In The Tax Return
Once the HRA claims have been calculated, including the exemption in the tax return is important while filing income tax returns. The exemption can be claimed by entering the details of the actual HRA received, actual rent paid, and the least of the three components in the relevant fields of the tax return form.
Ensuring that the HRA exemption is correctly claimed while filing the tax return is important to avoid any scrutiny or penalties from the income tax department. Following the above steps, individuals can accurately calculate their HRA claims and claim the maximum exemption while filing their income tax returns.
Step 5: Consider The City Of Residence
The HRA exemption amount depends on the city of residence of the individual. The cities are classified into three categories – metro cities (Mumbai, Delhi, Chennai, Kolkata), non-metro cities with a population of more than 10 lakhs, and non-metro cities with a population of less than 10 lakhs. The exemption amount is highest for metro cities, followed by non-metro cities with a population of more than 10 lakhs, and least for non-metro cities with less than 10 lakhs.
Therefore, while calculating HRA claims, individuals must consider the city of residence and the corresponding exemption limit for that city. It is important to note that the exemption limit is subject to change from year to year and should be checked before filing the income tax return.
Step 6: Calculate HRA Claims For The Partial Year
Suppose an individual has changed jobs or shifted residences during the financial year. In that case, the HRA exemption must be calculated based on the actual period of residence in each place. This is because the exemption limit for HRA is calculated every month.
In such cases, the actual HRA received, and the actual rent paid must be calculated separately for each period. The HRA exemption needs to be calculated based on the least of the three components for each period. The total HRA exemption for the financial year is the sum of the amount calculated for each period.
To make the most out of HRA claim and minimize tax liability, individuals can consider the following tax planning techniques:
Step 7: Optimize Rent Payment
Since the HRA exemption is calculated based on the actual rent paid, individuals can negotiate the rent amount with the landlord to ensure that they pay the least possible amount of rent while still meeting the exemption limit. This can help maximize the HRA exemption and minimize the tax liability.
Step 8: Coordinate With the Spouse
If both spouses work and receive HRA, they can consider splitting the rent payment and claim the exemption separately.
Step 9: Home Loan Interest Deduction
If an individual has taken a home loan, they can claim a deduction for the interest paid on it under Section 24 of the Income Tax Act. This can reduce the taxable income and increase the HRA exemption.
Step 10: Claim Additional Deductions
Apart from HRA exemption, individuals can also claim other deductions, such as medical expenses, investment in tax-saving instruments, etc., to further reduce their tax liability.