All about House Rent Allowance

House Rent Allowance (HRA) granted to an employee is exempt to the extent of least of the following:

• HRA actually received

• Rent paid (-) 10% of salary for the relevant period

• 50%/ 40%* of salary for the relevant period

*50% in case of Metro Cities (Delhi, Mumbai, Kolkata, Chennai), 40% in case of other cities

Notes:

• Exemption is not available to an assessee who lives in his own house, or in a house for which he has not incurred the expenditure of rent.
  

• Salary = Basic Salary + Dearness allowance + Commission
  

• Relevant period means the period during which the said accommodation was occupied by the assessee during the previous year.

Frequently Asked Questions

Mr. Ramesh has the following salary structure:

Basic Salary

INR 40,000 per month

Dearness Allowance

INR 6.000 per month

Other Allowance

INR 40,000 per month

House Rent Allowance

INR 25,000 per month

Ramesh paid INR 30,000 per month for his stay in Bangalore. What will be his HRA exemption?

HRA exemption will be the least of the following:

HRA actually received

(INR 25,000 x 12)

INR 3,00,000

Rent paid (INR 30,000 x 12)

(-) 10% of salary [10% x (40,000 + 6,000) x 12]

Exemption

INR 3,60,000

(-) INR 55,200

INR 3,04,800

40%* of salary

[40% x (40,000 + 6,000) x 12]

INR 2,20,800

Lowest of the above is INR 2,20,800. Taxable HRA will be

INR 3,00,000 – INR 2,20,800 = INR 79,200

Galactic Tip:

In Ramesh’s case, the best option he has is to talk to his company and alter his salary structure. The “other allowance” component needs to shift to Basic Salary or Dearness allowance to allow him to claim a higher deduction.

I stay at my parent’s house. Can I pay them rent to claim HRA deduction?

This can be done. You need to have appropriate documentation to support the payments viz. Rental Agreement, Rent receipts and bank statements reflecting payment.

Ensure you pay rent to your parents every month. Also note that this rent will have to be included in your parent’s income under Income from house property.

Do I have to deduct TDS if I pay rent to a landlord/ my parents?

If your landlord is a resident, you are required to deduct TDS only if rent per month exceeds INR 50,000 – keep this in mind if you are structuring HRA.

If your landlord is a non-resident, you are required to deduct TDS irrespective of amount involved.