What is House Rent Allowance (HRA)? HRA Exemption, Tax Deductions, Rules & Regulations
House Rent Allowance (HRA) is a standard component of a salaried individual's income and tends to pay for the cost of renting a house. It gives monetary help to employees who live in rented houses and is subject to tax exemptions as discussed under the Indian tax laws. But to gain the maximum advantage of HRA exemptions, individuals need to know about the terms and conditions, calculation methods, and the documents necessary.
What is HRA (House Rent Allowance)?
HRA basically is a component of an employee's salary that is paid to compensate an employee living in a rented house with an allowance to cover house rent charges.
HRA is usually a part of the salary package; not only does it provide a financial gain, under Section 10(13A) of the Income Tax Act, but it also comes with specific tax exemptions, depending on several conditions.
Is HRA Taxable?
HRA might be partially taxable, meaning that any amount not exempt from taxation is carried into the employee's taxable income. The tax liability on HRA is determined by several criteria like the amount of rent paid, the salary of the individual, the city of residence, and whether one has any house to live in or not.
The exemption is calculated as the least of the following three conditions:
- HRA actually received by the employee
- Rent paid minus 10% of basic salary.
- 50% of the basic salary for metros like Delhi, Mumbai, Kolkata, and Chennai or 40% of basic salary for non-metros.
HRA for Self-Employed Individuals
Freelancers or other self-employed individuals do not receive HRA from an employer, but they can claim a deduction under Section 80GG of the Income Tax Act for rent paid. This deduction can be claimed only when the self-employed person stays in a rented house and does not receive any HRA.
Allowed for deduction under Section 80GG are the lesser of:
- ₹5,000 per month.
- 25% of total income.
- Rent paid minus 10% of total income.
Note: Self-employed individuals must file Form 10BA while claiming any deduction under Section 80GG.
Salaried Individuals and HRA
On the contrary, salaried individuals can claim HRA exemption directly under Section 10(13A) of the Income Tax Act. However, this requires meeting some specific criteria. The extent of HRA exemption, as previously discussed, is calculated based on three factors:
- Actual HRA received.
- Rent paid minus 10% of basic salary.
- Percentage of basic salary - 50% for metro cities; and 40% for non-metro cities.
However, unlike the case of the self-employed, in the case of salaried employees, the HRA exemption is not automatic. They still have to fulfill documentation requirements, which include furnishing rent receipts so that necessary deductions can be taken into account in the computation of income tax.
How to Claim HRA Exemption When You File Tax Returns?
To claim an HRA exemption, you will have to provide the following documents:
- Rent Receipts: Rent receipts are a very good form of proof for rent paid. Ensure that the receipts must be confirmed by your landlord, mentioning the rent and duration clearly.
- Rental Agreement: Preferably get a rental agreement that confirms you are living in a rented property.
- Landlord's PAN: This document becomes mandatory if the annual rent exceeds ₹1 lakh, as per provisions in the Income Tax Act to promote transparency.
- Proof of Payment: In case you don’t have receipts for rent, also bank statements showing the rent paid can work as proof.
You can claim HRA exemption while filing your income tax returns (ITR). It is important to have all the necessary documents at hand to avoid any complications during the tax filing process.
How to calculate HRA Exemption?
The computation of HRA exemption is based on the minimum of the following referrals:
- Actual HRA received: This is the HRA figure received by the employee from the salary figures.
- Rent paid minus 10% of basic salary: To calculate this, multiply your monthly rent by 12 (annual figure) and subtract 10% of your yearly basic pay.
- Percentage of basic salary: This will depend upon the city you live in (50% for metro cities and 40% for non-metro cities) calculated from your basic salary.
Example: Consider an individual with the following details:
- Basic Salary: ₹40,000/month
- HRA received: ₹15000 /month
- Rent paid: ₹12000 /month
- City: Delhi (Metro city)
- Actual HRA received: ₹15,000 × 12 = ₹1,80,000
- Rent paid - 10% of basic salary: 12,000 × 12 - (10% of 40,000 × 12) = 144000 - 48000 = 96000
- 50% of basic salary: (50% of ₹40,000) × 12 = ₹2,40,000
In this case, the exempted HRA will be ₹96,000, as it is the least of the three amounts.
For your convenience, you can use the HRA calculator for more calculations.
Can I Claim HRA and Deduction on Home Loan Interest?
Yes, one is eligible to claim both HRA exemption and deduction on home loan interest deduction under Section 24(b) of the Income Tax Act provided certain conditions.
- HRA exemption: The exemption is to be claimed based on the rent paid for occupying leased accommodations.
- Home loan interest deduction: You would be able to claim home loan interest, even if you have rented a property and are living there; provided, in the interest of the home loan that you are claiming it against, you are not occupying it. In other words, if living in a house, that is rented, you cannot claim HRA off the property that you own.
In short, the key is to see that you don't claim two deductions for one property.
When Do You Need a Landlord’s PAN?
As mentioned earlier, in cases where the rent exceeds ₹1,00,000 per annum, the PAN of the landlord must be furnished while claiming HRA exemption to maintain transparency and to curb tax evasion.
If the landlord is non-cooperative in giving their PAN, then the Income Tax Department may disallow the entire HRA exemption during that year. In this case, the employee becomes liable to pay tax on the entire HRA amount received.
What If I Don't Receive an HRA?
If your employer does not provide you with an HRA, you cannot claim the standard HRA exemption. However, if you live in a rented house, you may claim a deduction under Section 80GG.
How to Claim HRA While Living with Parents?
You may claim HRA exemption to an extent even while living with your parents, provided that the following conditions are fulfilled:
- Rent Paid: You have to pay rent to your parents, and the rent should ideally be reasonable.
- Documentation: Maintain proper rent receipts signed by your parents as your landlords.
- Landlord's PAN: If the rent exceeds ₹1,00,000 annually, you will require your parents' PAN.
Be sure that actual rent is at market rates and has documentation to support this as a measure to prevent complications with tax authorities.
How to Claim Deduction Under Section 80GG?
If you are self-employed or do not receive HRA from your employer, you can claim a deduction under Section 80GG for rent paid. The deduction is the least of the following:
- ₹5,000 per month (₹60,000 annually).
- 25% of total income.
- Rent paid minus 10% of total income.
To claim the deduction, you will have to file Form 10BA, which confirms your compliance status for the eligibility criteria.
Conclusion
House Rent Allowance (HRA) serves as an important tax-saving option for employees who rent their homes. By familiarizing yourself with the relevant rules and exemptions, you can lower your tax burden significantly. Whether you work for a salary or are self-employed, tax laws offer ways to claim deductions on your rent payments, making it essential to keep accurate records and documentation.
With the recent updates in the Union Budget 2025-26, HRA continues to be a beneficial method for tax savings, but staying updated on the rules and procedures is key.
Frequently Asked Questions (FAQ)
HRA is a component of salary paid to an employee involved in accommodating housing rent. It provides a stipend for payment of rent, received along with tax exemptions under certain discriminatory provisions relating to the Indian income tax law.
HRA may be, in part, taxable. The HRA exemption will depend on the actual HRA received, rent paid, less 10 percent of the basic salary, and the basic salary's percentage (in the case of metropolitan cities 50 percent, whereas for other cities, 40 percent).
No. As per the law, self-employment does not provide HRA. Self-employed individuals may claim a deduction under Section 80GG for the rent paid, subject to certain conditions.
For claiming an exemption under HRA, documents like rent receipts, rental agreements, and the landlord's PAN number (if the annual amount is more than one lakh) must be submitted. The proof for the above must be kept handy when filing tax returns.
Yes, you can forget the HRA and the home loan interest deduction, but for different properties. You can't take credit for more than one property. HRA permits rented houses, whereas interest on home loans is awarded for properties owned yet not inhabited.
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