Salaried individuals, who live in rented houses, can claim the House Rent Allowance (HRA) to lower their taxes – partially or wholly under the Income Tax Act. The deduction available is the least of the following amounts:
- Actual HRA received
- 50% of [basic salary + DA] for those living in metro cities (40% for non-metros) or
- Actual rent paid less 10% of basic salary + DA
The eligibility criteria to avail HRA exemption is
- The person should be a salaried employee. Self-employed professionals cannot avail the deduction.
- He has the HRA component in his salary structure.
- He should be living in rented accommodation..
- Rent has to be actually paid – If you are staying on rent, you should actually pay the rent amount to the landlord and there should be adequate (proof of payment proof of payment like bank receipt (cash are not considered in scrutiny). Mere declaration and submission of rent receipts without transfer of money can’t be taken as sufficient proof to claim HRA benefits.
Let us refer the following example:-
Consider the scenario of an individual, Mr X
He earns a basic monthly salary of Rs. 30,000, Medical allowance of Rs 2,500, other allowances of Rs 2,500 and HRA of Rs 15,000. He pays Rs 12,000 as rent for accommodation in Mumbai.
- Actual HRA received = 15000*12 = Rs 180,000
- Actual rent paid annually over 10% of annual salary = 12000*12=144000-10% of [(30,000 x 12)] = Rs 1,08,000
- 50% of salary (metro city) = [(30,000 x 12) x 50%)] = Rs 180,000
Rs 1,08,000 is the least value obtained out of the three methods. Thus, the amount of HRA exempt will be Rs 1,08,000.
Can I pay rent to my parents and claim HRA?
Yes, one can claim the HRA exemption by paying rent to their parents. It is always advisable to have a rent agreement. One would require rent receipts in order to claim HRA exemption. Also, your parents need to show rental income from you in their income tax return. Therefore, those who live with their parents can pay rent to their parents and save tax on HRA.
What are the necessary documents required to claim HRA?
To claim HRA, one has to submit important documents like:-
- Rent receipts –
- Rent Agreement – When you pay rent to your parents for living in their home, they become your landlord. The Income Tax department requires proof for this. A rent agreement between you and your parents is this proof.
- PAN No of the landlord – If your annual rent payment exceeds Rs 1 lakh, you are required to provide the PAN card details of your landlord, in this case, your parents, to your employer.
- Name of the landlord and tenant
- Address of the rented accommodation
- Duration of stay
- A revenue stamp
- Signature of the landlord on the revenue stamp
Parents Must Pay Tax on Rental Income
The rent paid by you becomes a source of income for your parents. They must declare this and pay taxes on the same. It should be included under ‘Income from House Property.’ They can claim an exemption on the property taxes paid by them. They can also deduct 30% of the rental income as maintenance expense.
Can I claim both home loan deduction and HRA?
Yes, If you are a homeowner and you are paying back your home loan, you can claim HRA if you live in a rented property. You are allowed to get both the benefits to reduce your taxable income.