How to claim HRA to maximise tax exemption

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Updated: July 10, 2015 4:31:51 PM

If you are a salaried employee and staying in a rented accommodation, you can claim the house rent allowance (HRA) exemption...

taxes-rupee780For claiming the exemption, the employee must stay in a rented house during the period for which the exemption is being claimed and must have actually incurred the expenditure on payment of rent.

If you are a salaried employee and staying in a rented accommodation, you can claim the house rent allowance (HRA) exemption under Section 10(13A) of the Income Tax Act, 1961. However, self-employed professionals cannot claim the HRA exemption under this Act, as they do not earn salary. They can claim benefits on the house rent expenses incurred under section 80GG, which resembles section 10(13A), but is subject to certain conditions.

The HRA exemption is available for least of the following amounts: a) Actual HRA amount received from the employer; b) the amount of rent you pay for your house in excess of 10% of your basic pay; c) fifty per cent of the basic salary, if you reside in a metro city, and 40% of the basic pay for non-metro cities.

For claiming the exemption, the employee must stay in a rented house during the period for which the exemption is being claimed and must have actually incurred the expenditure on payment of rent. For computing the HRA exemption, salary means ‘basic salary’, dearness allowance, if the terms of employment so provide, and commission based on a fixed percentage of turnover achieved by the employee. While one can pay rent to parents to claim the HRA exemption, they need to pay tax on the rent received.

The employee will have to submit rent receipt/rent agreement to the employer for availing the HRA exemption. The employer needs to only obtain a rent receipt/rent agreement from the employee; however, the employer is not required to verify the receipt for granting the exemption to the employees. An employer is not required to obtain any rent receipt from an employee if the rent is less than R3,000 per month. If the amount of rent claimed is more than R1,00,000 per year, the Permanent Account Number (PAN) of landlord has to disclosed. If the landlord does not have a PAN, the employee is required to submit a declaration to this effect from the landlord along with the name and address of the landlord.

Moreover, under the Income Tax Act, an employee can claim the HRA exemption even if he owns a house but stays in a rented accommodation. This will be possible in cases where the employee owns a house in some other city and cannot stay in the house because of job location. Also, if an employee has taken a loan from a bank or a housing finance company to buy the house, he can avail the deduction of interest under Section 24 of the Income Tax Act as well as repayment of principal towards loan under Section 80C of the Act, even if one is claiming the HRA exemption while staying in a rented accommodation in another city.

The rent receipt should have a one rupee revenue stamp with the signature of the person who has received the rent and other details such as the rented residence address, rent paid, name of the person who has paid the rent. While HRA is a major tool to save tax, it is equally important to keep every documentation properly, in case demanded by the tax authority.

Earning Curve:

* Self-employed professionals cannot claim the HRA exemption under Section 10(13A) of the I-T Act, 1961, as they do not earn a salary
* They can claim benefits on the house rent expenses under section 80GG, which resembles section 10(13A) but is subject to certain conditions
* For claiming the HRA exemption, the employee must stay in a rented house during the period for which the exemption is being claimed
* While one can pay rent to parents to claim the HRA exemption, they need to pay tax on the rent received
* The employee will have to submit the rent receipt/rent agreement to the employer for availing the HRA exemption

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