HRA Exemption – Maximize Tax Benefit In India

By Anil Gupta, 0  Finance

Calculate House Rent Allowance (HRA) exemption with formula. Monthly rent to get the highest tax rebate in Metro or non metro city. Rent receipts required.


HRA is house rent allowance paid by company to meet your rent expenses and this amount is tax deductible (tax free) up-to some extent. This tax deductible amount is calculated on the basis of 3 rules defined by house rent allowance rules and regulations of Income tax department.

If you are a salaried professional and living in a rented house, HRA exemption is one of the most lucrative tax saving option, under Section 10 (13A) of the Income Tax Act.
For self employed , HRA tax deductions under Section 80 GG are available.

This is a simple online FREE HRA tax exemption calculator which can help you with the best value of rent if you enter you enter your basic and HRA amounts.

Features

  1. Have the option of calculating the values for financial year 2011-2012, 2012-2014 upto 2017. Updated for year 2016-17.
  2. There is no need to download any excel or any other software. It is online and you can use it anytime, if you have internet access.
  3. Works for any financial year. Just select the relevant year from the options.
  4. Create a short URL (link) for the calculation, that you make, and then share it or save it for future reference.
  5. No sign up required. Its completely free.
  6. Suggests best or optimum monthly rent to get the maximum possible HRA exemption for your specific salary package.

As a layman, most of us have this understanding that whatever HRA amount, we receive, as part of our salary is the maximum amount eligible for Income Tax HRA exemption.

For example, if you are receiving 5000 per month as HRA, then while calculating the HRA tax rebate, only 5000 will be considered even if you pay more rent. This is NOT correct. Read on to know the details.

The exemption is capped by income tax department to the least of following 3 values as per, house rent allowance rules and regulations:

1.Actual HRA received during the financial year.
2.
50% of BASIC salaryIf residing in METRO city (Only Mumbai, Kolkata, Delhi or Chennai)
40% of BASIC salaryIf residing in Non-METRO city
3.Rent paid in excess of 10% of BASIC salary. i.e.Excess Of Rent = Rent Paid – 10% of Basic

Please note that HRA (one of the component of your salary package), is actually defined by your Basic salary in most cases. i.e. It is normally 40% or 50% of your basic salary.

Example:

If your basic salary is INR 10,000 per month, then your HRA component would be either INR 4000 or INR 5000. The 40% or 50% factor is dependent on your specific company policies. The income tax rebate of either picking 40% or 50% is defined by your residence location’s METRO city test.

HRA exemption in India

HRA rules – Find Rent for maximum tax exemption in India

The income tax rules also base their tax rebate calculation on the basic salary amount as you can see in rule 2 and 3 above.

Lets consider the example:

Basic salary10,000
HRA (50% of Basic Salary)5000
ResidenceMetro City – Delhi
Rent paid/declared5,000 per month

Now, if you are declaring rent of Rs. 5000 per month considering that you are declaring more than your HRA amount i.e. INR 5,000, would not make any difference, then you are wrong. Quickly running through the 3 rules would make things clear here.

RuleDescriptionEligible Amount
Rule 1Actual HRA (12 months)60,000 (12*5,000)
Rule 250% of yearly Basic Salary60,000 (50% of 10,000*12)
Rule 3Excess Of Rent = Rent Paid – 10% of Basic48,000 (60,000 – 12,000 [10% of 1,20,000])
Least of the three amount:48,000

If you scan carefully, you are only eligible for Rs. 48,000 as tax deduction even though your yearly HRA and rent-paid (and declared) amount is 60,000. Income tax officials have designed the rules so cleverly that you will always end up getting the least tax rebate if you look at the HRA component alone.

It is simple mathematics if you just look at the rules and do some calculation.

The rules are primarily based on basic salary, HRA amount and rent paid/declared. You can’t change basic salary and HRA component. But you can certainly change your rent paid amount.

So, the hack is that if you pay a rent figure which brings the amount in all three rules equivalent to the maximum of three, you would be eligible for maximum tax rebate.

Here is an example to clarify the concept more. We are just increasing the rent paid amount to Rs. 6,000 keeping basic and HRA same as in above example and re-calculate the 3 rules:

RuleDescriptionEligible Amount
Rule 1Actual HRA (12 months)60,000 (12*5,000)
Rule 250% of yearly Basic Salary60,000 (50% of 10,000*12)
Rule 3Excess Of Rent = Rent Paid – 10% of Basic60,000 (72,000 – 12,000 [10% of 1,20,000])
Least of the three amount:60,000

If you look at the least amount now, it is INR 60,000 which is equal to the maximum of three values too.

If you want to do it on your own, here are the steps you should follow:

  1. Find the maximum value by applying Rule 1 and Rule 2. Lets call this value ‘Optimum’
  2. Now use this mathematical formula to find the Rent (yearly)

    [(10 * Optimum) + Yearly_Basic_Salary] / 10 = Yearly_Best_Rent

    This will give you the value of Yearly Rent that will give you the maximum tax rebate. Divide this amount by 12 to reach the figure of monthly rent.


Frequently Asked Questions


Do I need to submit any proof for my HRA claim?


Yes, if the total rent that you declare for full year (12 months) is more than INR 1,00,000. This makes it about INR 8,333 per month.
This specific rent receipt limit was added by income tax in 2013.

Here are the 3 different scenarios:

Rent per monthProof required
Up-to INR 3,000No proof required, just declaration is enough
3,000 to 8,333
Rent receipts required.
Need to have 1 Rupee revenue stamp.
Signature of landlord on rent receipt
8,333 or up
Rent receipts required.
Need to have 1 Rupee revenue stamp.
Landlord’s PAN number mandatory
If Landlord’s does not have PAN number, then a declaration from him/her on plain paper citing the reason for NOT having PAN. Landlord’s address and phone number need to be mentioned too.

Can I get HRA tax exemption and tax rebate on my home loan at the same time?


Yes, you can. This is a specific case where you have rented a house (for yourself) even though you have your own home, for which you are paying home loan EMIs.

You can claim both the benefits if the home loan is paid for a house bought in a city which is too far away from your work office. This is generally considered to be 50 Kms away. There is no documented Kms limit in the tax laws. So, it is hard to define any limits here.

Can I pay rent to my wife or spouse or parents to claim HRA tax benefit?


Yes, you can. In the eyes of Income tax, each individual is a separate entity and hence can have his own income.

You can pretty well pay the rent to your spouse and claim the HRA tax exemption for your income. The only caveat is that the rent paid should be counted as INCOME for the spouse or the parents.

If your spouse or parents do NOT have any other income source, then this INCOME (rental) could be pretty beneficial. On one hand, they might not even cross the minimum income tax slab to be required to pay any tax. Currently, people with total yearly income of INR 2,50,000 need not pay any income tax.
On second hand, you are claiming tax exemption on this rental amount.

This way, the tax saving remains within the family.

If you are staying in your home (that you own), you can’t show the rent as ‘paid’ to yourself. This is NOT allowed as per law.

Also, if you are paying rent to your parent or spouse, there should actually be a valid transaction that shows the flow of money from your account to their account, somehow. This would be required if the income tax officer questions your intent.

Comments, suggestions and queries are most welcome.