For an individual who is staying at a place of rent, the employer includes a certain allowance in the remuneration of the employee to pay the house rent.
The allowance is used by the employer to pay for their rental expenses and accommodation charges. According to the new Income Tax Act, an employee is exempted from paying tax on house rent allowance. This is commonly known as HRA exemption.
Calculation of House Rent Allowance
It is important to calculate the amount of HRA exemption that an individual is getting before the end of a financial year as they have to fill in their tax forms and submit it during this time of the year. House Rent Allowance is almost paid to each and every individual from the employer in one way or another, and there are many situations that arise and cases that can be compared where HRA exemption is valid. For understanding how HRA is calculated, the following example should make it clear.
Rahul is an individual who is living in Kolkata and has a basic salary of Rs50,000 per month which is given to him by his employer. The amount of House Rent Allowance that he gets from the same employer is Rs15,000. The amount of excess rent that he is paying over 10% of his salary is Rs1,75,000. Between all the three figures that have been stated above, the least of them is exempted from tax. This means that a figure of Rs15,000 is exempted from tac for Rahul.
There is a special case for those individuals who get HRA and are living with their parents. Then they ask the company of how they can be exempted from the tax that they need to pay the government. The solution for this is simple. They can apply for HRA exemption by showing that they pay rent to their parents. For availing this exemption, it is needed to be shown that the parents are the real owners of the house and that they are being paid rental income should reflect on their income tax returns.
HRA Exemption from Tax
Usually, though HRA exemption is considered completely exempted from tax, there are a certain number of conditions that need to be met by an employee in order for them to be exempted from paying taxes on their House Rent Allowance. The conditions for the same include:
- The House Rent Allowance needs to be paid by the employer.
- The actual rent that is paid for the accommodation needs to be subtracted from 10% of the salary that the individual receives from the employer.
- The rent allowance can be 50% of the basic salary for those who are living in metropolitan cities like Mumbai, Delhi, Chennai, and
- The rent allowance can be 40% of the basic salary of an individual if they are living in a non-metro city.
The remainder of the money after paying the accommodation price is added back to the basic salary of an individual.
Claiming House Rent Allowance
At the end of each financial year, those individuals who are working for an employer and whose salary is well above the minimum salary that is a taxable need to file their income tax and give it to the employer. Taxes need to be paid to the government and is applicable for everyone, either directly or indirectly. The income taxes that workers file at the end of a financial year are direct ways in which the government is being paid their taxes.
For an individual who wants to avail of HRA exemptions, they need to give the receipts for rent with their income tax forms and submit it. These receipts are proof that rent is being paid on a regular basis by the employee and that he/she is paying the rent through the house rent allowance that is provided through the employer. Again, if there is any amount of money that is remaining from the house rent allowance, then it is added directly to the basic salary of a person which will be taxable by the government.
In the case that an individual cannot provide proof in the form of house rent bills, there is no need for them to panic as the claim for HRA can be done later on when the same individual is filing for income tax returns. Most companies and employers try to avoid going through the loophole of income tax returns as it is a long and stressful process. So, they urge their employee to collect receipts as proof for house rent allowance.
In the special case of someone who has taken a home loan and has bought a property and is still getting HRA from their employer, they can claim for house rent allowance by stating that they are returning the home loan that they got from the back. This is a benefit that is availed by many individuals to lower their taxable income.