House Rent Allowance (HRA) is one of the largest exemptions available to salaried individuals who live in rented accommodation. The exemption is governed by Section 10(13A) of the Income Tax Act, read with Rule 2A. Many employees either under-claim HRA or over-claim it and face scrutiny. This guide explains how the exemption is calculated, what documents you need, and the mistakes that frequently lead to disallowance.
Who can claim HRA exemption?
HRA exemption is available only to salaried individuals (and pensioners, in some cases) who receive HRA as part of their salary. Self-employed professionals cannot claim HRA — they can, however, claim a deduction under Section 80GG (subject to conditions). The exemption is available in both the old and (only for metro-pensioner cases) is most relevant in the old regime — the new regime does not allow HRA exemption.
How is the exemption calculated?
The exempt portion of HRA is the least of the following three amounts:
- Actual HRA received from the employer during the year.
- 50% of basic salary if the employee lives in a metro city (Mumbai, Delhi, Kolkata, Chennai), or 40% of basic salary otherwise. "Basic salary" here means basic + DA (if part of retirement benefits).
- Rent paid minus 10% of basic salary. (If rent exceeds 10% of basic, the excess reduces the HRA — but the formula gives the exempt portion, not the deduction.)
For example, suppose your basic salary is Rs 60,000 / month, HRA is Rs 25,000 / month, and rent paid is Rs 30,000 / month in Hyderabad (non-metro). Annual values:
- Actual HRA = Rs 3,00,000
- 40% of basic = Rs 2,88,000
- Rent paid – 10% of basic = Rs 3,60,000 – Rs 72,000 = Rs 2,88,000
Exempt HRA = least of (Rs 3,00,000, Rs 2,88,000, Rs 2,88,000) = Rs 2,88,000. The balance Rs 12,000 is taxable.
Documents required
The income tax department has not prescribed a specific format for claiming HRA, but you should keep the following on file:
- Rent receipts — monthly or quarterly, signed by the landlord, with the amount and period.
- Rent agreement — registered or unregistered is fine, but the agreement should be in force for the entire period you are claiming.
- Landlord's PAN — required if annual rent exceeds Rs 1 lakh. Quoting PAN in Form 12BB is mandatory.
- Landlord's address and contact — in case the department asks for confirmation.
What if I own a house and pay rent?
If you own a house in one city and pay rent in another (e.g. you own a house in your hometown but work in another city), HRA is still available for the rented house, provided you do not own the rented house. If you own a house and live in it, no HRA is available. If you own a house in the same city and claim HRA for another house in the same city, the department may disallow the claim — the position has been litigated extensively and the safer view is that HRA is disallowed where the employee owns a house in the same city.
Advance rent and security deposit
Advance rent paid to a landlord is allowable over the period to which it relates — i.e. an advance of Rs 3 lakh for a 3-year lease is spread equally over 36 months. A refundable security deposit is not deductible. Non-refundable deposits (sometimes called "key money") are deductible over the lease period.
Common mistakes
- Claiming HRA without rent receipts or a registered agreement — employers may ask for these; keep them safely.
- Not obtaining landlord PAN when rent exceeds Rs 1 lakh — the claim is denied if PAN is not provided.
- Claiming HRA while owning a house in the same city — disallowed in most cases.
- Claiming HRA for the entire year even though you joined mid-year — claim should be proportionate to the months you actually received HRA and paid rent.
- Mixing personal and HRA rent — keep a single rent agreement for the property; do not split with a co-tenant without proper disclosure.
If you cannot claim HRA — Section 80GG
Self-employed individuals, consultants, and those who do not receive HRA can claim Section 80GG (only under the old regime). The deduction is the least of Rs 60,000 per year, 25% of total income, and rent paid – 10% of total income. The taxpayer must not own any residential accommodation in the place of work.
FAQ
Is HRA exempt in the new tax regime?
No. HRA exemption is only available under the old regime. For new-regime taxpayers, the higher standard deduction of Rs 75,000 partly compensates.
Can I claim HRA if I pay rent to my parents?
Yes — the rent is a legitimate expense if you genuinely pay rent, the parents declare it as rental income, and you can demonstrate that the arrangement is at arm's length (a rent agreement, receipts, and a bank transfer for the rent).
Is HRA available on a furnished flat?
Yes. The rent paid includes the rent for furniture, fixtures, and fittings. No separate valuation is required.
For help optimising your salary structure or claiming HRA correctly, talk to a CA at ABMCO. You can also use our free HRA Calculator.
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