The seasonal mad frenzy surfaces from time to time. Most often towards the end of every financial year or in the beginning of the year, when we think of tax planning, certain doubts and queries about the various tax components play havoc on our minds. To put some of those queries to rest, we take up for discussion the tax exemption you can claim from your house rent allowance.
(Also read: Home loans and HRA - how the tax works out)
1. How is HRA accounted for in the case of a salaried individual and a self-employed professional?
HRA (house rent allowance) is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. On the other hand, self-employed professionals cannot be considered for HRA exemption under this act, as they do not earn a salary. However, they can claim benefits on the house rent expenses incurred under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.
2. What are the dependent factors in calculating HRA for the salaried individual?
When you are calculating HRA for tax exemption you take into consideration four aspects which includes salary, HRA received, the actual rent paid and where you reside, i.e., if it is a metro or non-metro. If these aspects remain constant through the year, then tax exemption is calculated as a whole annually. If this is subject to change, as in a rent hike, pay hike or shift in residence etc. then it is calculated on a monthly basis. It is usually rare for all the values to remain constant in a financial year.
The place of residence is significant in HRA calculation as for a metro the tax exemption for HRA is 50 per cent of the basic salary while for non-metros it is 40 per cent of the basic salary. This holds true especially when you work at a metro and reside at a non-metro. In this case, your city of residence only will be considered for calculating your HRA.
3. Can I pay rent to my parents or spouse to avail HRA benefits?
You can pay rent to your parents. However, they need to account for the same under 'Income from other sources' and will be entitled to pay tax for the same.
On the other hand, you cannot pay rent to your spouse. In view of the relationship when you take up residence together, you are expected to do so and hence such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny, so steer clear of these.
4. Do I need to submit any proof for my HRA claim?
You need to submit proof of rent paid through rent receipts, for which only two need to be submitted, one for the beginning of the year and one towards the end of the financial year. It should have a Re 1 revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it, etc.
5. How do I calculate my HRA?
To figure out how much HRA exemption you are eligible for, consider the following:
a. The actual rent allowance the employer provides you as part of your salary,
b. The actual rent you pay for your house, from which 10 per cent of your basic pay is deducted,
c. Fifty per cent of your basic salary when you reside in a metro or 40 per cent if you reside in a non-metro.
The least value of these three values is allowed as tax exemption on your HRA. You can discuss restructuring your pay structure with your employer in order to avail the most of your HRA tax benefit.
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