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How to Save Income Tax on House Rent Allowance

Highlights

  • See how much tax you can save on the House Rent Allowance.
  • Check the numerical example to understand the working of Tax Exemptions for HRA.
  • Go through the documents required if you are going for the HRA Tax Exemption.

House Rent Allowance is a component of salary paid to the employee by the employer in the favour of accommodation and cost of living in that city. But you might be not aware of the fact that HRA is a part of net salary and it is taxable as per the tax laws. So, under Section 10 (13A) of the Income Tax Act, there is a tax exemption through which you can reduce your tax liability. On the other hand, there is a rule for this exemption and you can save income tax on house rent allowance (HRA). Let’s explore the rule of HRA’s Exemption and then see how it will help you to remove the tax burden from the salaried individuals. 

Exemption Under Section 10 (13A) of House Rent Allowance

The least of the Following amount will be exempted from tax and it will be not included in your net taxable income.

  • Actual House Rent Allowance
  • 40% of the Salary in Non-Metro Cities and 50% of the Salary in Metro Cities.
  • Rent Paid – (10% of Salary)

Basic Terms and Conditions

  • Actual HRA- The Value of the actual HRA will be of 12 months.
  • Metro Cities include only Kolkata, Mumbai, Chennai, and Delhi.
  • Salary would include the Basic Salary, Dearness Allowance, and Commissions.
  • The Tax Benefit will be provided only for the time period when the employee was living in a rented house.
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Tax Saved on HRA u/s 10 (13A) (Metro City like Delhi, Chennai, Mumbai, and Kolkata)

ParticularsAmount (INR)
Basic Salary8000 per month
D.A2000 per month
House Rent Allowance Received8000 per month
Rent Paid9000 per month
Tax Rate Applicable20%

Calculation

  • Total Salary Per Month- 10000
  • Total Salary Per Annum- 120000
  • Monthly HRA- 8000
  • Annual HRA- 96000
  • Monthly Rent- 9000
  • Annual Rent- 108000

The Least of the following will be exempted:-

  • Actual HRA- 96000
  • 50% of Salary- 60000
  • Rent Paid – (10% of Salary) = 108000-12000= 96000

The least of the Above will be exempted and it is ₹60000.

So the tax will be charged on:-

Actual HRA – Least Exempted Value = 96000-60000= 36000

Tax on HRA= 20% of 36000= 7200

If you haven’t claimed for exemption:-

Tax on HRA = 20% of 96000= 19200

Total Savings on your HRA will be 19200-7200= 12000

Tax Saved on HRA u/s 10(13A) (Non-Metro City)

ParticularsAmount (INR)
Basic Salary8000 per month
D.A2000 per month
House Rent Allowance Received8000 per month
Rent Paid9000 per month
Tax Rate Applicable20%

Calculation

  • Total Salary Per Month- 10000
  • Total Salary Per Annum- 120000
  • Monthly HRA- 8000
  • Annual HRA- 96000
  • Monthly Rent- 9000
  • Annual Rent- 108000

The least of the following will be exempted:-

  • Actual HRA- 96000
  • 40% of Salary- 48000
  • Rent Paid – (10% of Salary) = 108000-12000= 96000

The least of the Above will be exempted and it is ₹48000.

So the tax will be charged on:-

Actual HRA – Least Exempted Value = 96000-48000= 48000

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Tax on HRA= 20% of 48000= 9600

If you haven’t claimed for exemption:-

Tax on HRA = 20% of 96000= 19200

Total Savings on your HRA will be 19200-9600= 9600 

Document Needed for HRA Tax Exemptions

  • If the total rent paid during the financial year is greater than ₹1 Lakh then the employee has to provide the details of the PAN card and a copy of the property owner.
  • The Receipts must include the following details:-
    • Date Name of the landlord
    • Name of the tenant
    • PAN card details of the landlord
    • Address of the rented accommodation
    • Duration of stay
    • A revenue stamp
    • Signature of the landlord, on the revenue stamp
    • The photocopy/Xerox of the rent-agreement

If the employee is living with his parents and giving them rent then also he is eligible to claim for tax exemptions related to HRA. But he will have to show supporting documents that he is paying rent to his or her parents and then only he is allowed for an exemption.

Summary

Well, you can claim for tax exemptions under Section 10 related to house rent allowance and save tax on it. On the other hand, if you don’t apply this deduction while computing your net income then you will have to pay extra taxes. Therefore, claim for this tax exemption and save income tax on House Rent Allowance.

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