House Rent Allowance is a significant portion of the salary. Many salaried individuals look for ways to save tax, and HRA can help in saving income tax. HRA is given by an employer so that an employee can manage rental expenses. However, with the introduction of the new tax regime, many salaried individuals are confused about whether the HRA tax exemption is available under the new tax regime, whether the HRA tax exemption can be claimed along with the home and most importantly, how HRA exemption is calculated.ET Wealth Online decodes these common questions of salaried employees.
Is HRA tax exemption available under the new tax regime?
Under the new tax regime, HRA tax exemption is not available. Section 115BAC, which governs the rules for the new tax regime, bars an individual from claiming HRA exemption.
A salaried individual wanting to pay income tax under the new tax regime cannot opt for certain tax exemptions. Some of them are as follows:
a) Section 10(5) – Leave Travel Concession
b) Section 10(13A) – House Rent Allowance
c) Section 10(14) – Covers special allowance details in Rule 2BB(such as children’s education allowance, hostel allowance, uniform allowance etc.
d) Section 24(b) – Interest paid on home loan
e) 57(iia) – Family pension
f) Deductions under Chapter VI-A containing Section 80C, Section 80D etc., except Section 80CCD(2).
Can you claim HRA tax exemption and deduction on home loan interest?
Under the old tax regime, HRA tax exemption and deduction on home loan interest are available. However, many salaried individuals are confused about whether they can be claimed together. For instance, a salaried individual may be living in a rental apartment near his office while his parents are staying at home, and the individual is paying the home loan EMI.
Tarun Kumar Madaan, a practising chartered accountant, says, “Many taxpayers are unaware that the Income Tax Act permits individuals to claim tax benefits for both House Rent Allowance (HRA) and home loan interest in the same financial year. This situation arises where a taxpayer lives in a rented property due to employment in a different city while simultaneously paying interest on a home loan for another property. Such circumstances may also include home loans taken out for houses occupied by family members. The tax laws allow both deductions, provided there is a genuine reason for not residing in the owned house, and the taxpayer can substantiate the claim with appropriate documentation. If the taxpayer rents out their owned property and lives in another rented house for convenience (e.g., proximity to workplace), both deductions are permissible. Rental income from the let-out property must be disclosed in the return.”
How is the HRA tax exemption calculated?
The Income Tax Act defines the rule to calculate the HRA tax exemption under the old tax regime. According to the rules, the minimum of the following is exempt from income tax:
a) Actual HRA received from an employer
b) 50% of salary if living in metro cities or 40% in non-metro cities
c) Excess of rent paid annually over 10% of annual salary.
Salary here means basic salary. If an employee is receiving a dearness allowance (DA), which forms part of retirement benefits, then DA is also considered part of the salary.
Here is an example to understand this. Suppose an individual receives an HRA of Rs 3,20,000 in a year and pays a monthly rent of Rs 30,000, i.e., Rs 3,60,000 annually in a metro city. The basic salary is Rs 8 lakh annually.
Here is how the HRA tax exemption will be calculated:
a) Actual HRA received – Rs 3,20,000
b) 50% of salary for living in metro city – Rs 4,00,000 (50% of Rs 8,00,000)
c) Excess rent paid annually over 10% of annual salary – Rs 2,80,000 (Rs 3,60,000 – 10% of Rs 8,00,000).
The minimum amount of Rs 2,80,000 will be exempt from tax. The balance HRA received from the employer, i.e., Rs 40,000 (Rs 3,20,000 minus Rs 2,80,000), will be taxable.
Documents required to claim HRA tax exemption
A salaried taxpayer must have the following documents to claim HRA tax exemption:
- Rent Agreement
- Rent receipts
- PAN of landlord (if annual rent exceeds Rs. 1 lakh)
- Proof of rent payment (especially when paying rent to relatives)
- TDS deduction on rentals if rent exceeds Rs. 50,000 per month
