Tax Exemption: Under Section 10(13A) of the Income Tax Act, salaried employees get tax exemption on HRA. This exemption reduces your total taxable income.
Tax Exemption: If you are a salaried employee, then your salary slip will definitely mention House Rent Allowance (HRA). This is an important part of your salary which you get in return for the expenses incurred on rented house and most importantly, it helps you a lot in saving income tax. It is generally believed that to claim tax exemption on HRA, you have to pay rent to a landlord and show the rent receipt.
But do you know that there is a way by which you can claim tax exemption on HRA even without paying rent ‘traditionally’? Yes, this is absolutely possible and is also valid under the Income Tax rules, provided you fulfill certain conditions. Let’s understand this whole math.
What is the rule of HRA and tax exemption?
Under Section 10(13A) of the Income Tax Act, HRA paid to salaried employees is tax exempt. This exemption reduces your total taxable income. The rule is simple – you are getting HRA and you are actually living in a rented house and paying rent for it. If you live in your own house, you cannot claim tax exemption on HRA. Self-employed people also do not get this benefit of HRA exemption (though they can avail exemption under section 80GG with certain conditions).
How to claim HRA without paying ‘outside’ rent?
Now coming to that special situation. Suppose you are employed, you also get HRA, but instead of paying rent to an outside landlord, you live in your parents’ or a close relative’s house. Can you still claim HRA? The answer is – yes! The Income Tax Act allows you to do this, but with some important conditions:
1. Ownership of the house
The first and foremost condition is that the house you are living in should not be in your name. The house should be registered in the name of your parents or the relative to whom you are paying rent.
2. Actual rent payment
You have to actually pay rent to your parents or relative every month. This should not be just a paperwork. It is better to pay rent through bank transfer so that you have concrete proof of it.
3. Rent agreement and receipts
Get a formal rent agreement made, which mentions the rent amount and other terms. After paying the rent every month, make sure to take a rent receipt from your parents/relative. These documents may have to be shown to the Income Tax Department as proof.
Tax aspect for parents
Here is another important thing. The rent you pay to your parents or relatives will be considered as their ‘income from house property’. They will have to show this rental income in their Income Tax Return (ITR). They may also have to pay tax on this income as per the applicable tax slab.
However, there is an advantage to this as well. If your parents are senior citizens and do not have any significant taxable income, then this rent can become their source of income and it is possible that they may not have to pay any tax on it due to the basic exemption limit. In this way, you can take advantage of the HRA exemption and can also help them financially.
How much HRA amount will be exempted? (Calculation)
How much of the HRA you get will be tax free depends on three conditions. The amount which is the lowest among these three, you will get tax exemption on that amount.
1. Actual HRA received: How much HRA does your company give you annually.
2. Total rent paid minus 10% of your salary: (rent paid annually – 10% of your salary).
3. 50% of salary for Metro cities / 40% for non-metro cities: 50% of your salary if you live in Delhi, Mumbai, Kolkata or Chennai, 40% of your salary for other cities.
Here, salary means your Basic Salary + Dearness Allowance, if it is part of retirement benefits.
Example: Suppose your Basic+DA = ₹50,000/month (₹6 lakhs/year), you get HRA ₹20,000/month (₹2.4 lakhs/year), you live in Delhi and pay rent to parents ₹15,000/month (₹1.8 lakhs/year).
HRA received = ₹2,40,000
Rent – 10% of salary = ₹1,80,000 – (10% of ₹6,00,000) = ₹1,80,000 – ₹60,000 = ₹1,20,000
50% salary = 50% of ₹6,00,000 = ₹3,00,000
The lowest of these three (₹2.4 lakh, ₹1.2 lakh, ₹3 lakh) is ₹1,20,000. So, you will get tax exemption on HRA of ₹1.2 lakh per annum.
Living in your parents’ or relative’s house and paying them rent is a valid way to claim tax exemption on HRA. But for this, it is very important to have legal documentation (rent agreement, rent receipt, bank transfer proof) and follow the rules. Also, the rent recipient (parents/relatives) has to take care of their tax liability. If you have any doubts, it is always better to consult a tax advisor.
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