House Rent Allowance (HRA) is one of the components of the salary received by the employees. It is an allowance given to the employees for meeting the rental expenses for residential accommodation purposes. The employees claiming HRA allowance and living in a rented house can also save tax by claiming HRA allowance exemption under the Income Tax Act.
How is HRA exemption calculated?
The HRA allowance is either fully exempt or partially exempt. The exemption available is the lower of the following:
- Actual HRA received
- 50% of salary (basic salary and dearness allowance) for those living in metro cities (40% of salary for non-metros cities)
- Actual rent paid more than 10% of salary (basic salary and dearness allowance)
How to claim HRA when living with your parents?
If you stay with your parents and receive HRA from your employer, you can claim the HRA exemption by paying monthly rent to your parents. In addition, your parents have to file the income tax return by reporting the rental income received. They can claim a 30% standard deduction and also reduce property taxes from the rental income.
What documents are required to claim HRA exemption?
You can enter into a rental agreement with your parents. You can also prepare monthly rent receipts. The employers generally ask for a copy of rent receipts to allow you HRA exemption for calculating TDS to be deducted from your salary. It is essential to keep such records if the income tax department asks you to justify your claim of HRA exemption.
Important things to remember
However, one has to take care of the below points while claiming HRA exemption:
- You cannot claim both HRA and home loan deductions. However, if you live in another city due to a job posting, you can claim both HRA exemption and the home loan deduction, i.e. up to Rs 1.5 lakh for principal repayment and Rs 2 lakh for interest paid.
- You can claim HRA exemption only if your salary has an HRA component. If HRA is not a component of your salary, you can claim a deduction under Section 80GG after satisfying certain conditions. The taxpayers who are self-employed or who don’t receive HRA in their salary can claim a deduction under this section for the rent paid.
- Your parents should own the property, and they will have to show rental income under the head income from house property in their income tax return.
Hence, even if you stay with your parents, you can benefit from HRA exemption and save taxes. Also, if your parents are in a lower tax bracket than you, the family can save taxes as a whole. Moreover, senior citizens will enjoy a higher basic exemption limit (Rs 3 lakh for senior citizens whose age falls between 60-80 years and Rs 5 lakh for those above 80 years of age).
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For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in
I’m a chartered accountant and a functional CA writer by profession. Reading and travelling in free time enhances my creativity in work. I enjoy exploring my creative side, and so I keep myself engaged in learning new skills.
