Still In Fray Over Your HRA? Author: Fintuned | Date: February 7, 2015

Note: This idea has been contributed by our passionate intern Harshita, with inputs from the entire team.

There is no doubt in the fact that the second best moment in the world is to see the mail that says “The salary has been credited to your account”. Some of you may argue that the second position is not the right assessment, but since am the author, my opinion will prevail ;). And for me, the best moment in the world is finding a washroom when you are in dire, uncontrollable need (No, it is not creepy!)

Well, this blog is not about judging the creepiness of our jokes or deciding upon the position of several human emotions. As you might have noticed, our job is to develop your money sense (Haw, you did not know that yet 😛 ). In keeping with our noble mission, let us quickly get to the topic for this post. So, coming back to my point on salary, it is quite dear to see that mail in your inbox. However, if you would have taken the pain of glancing through your salary slip, the first thing [again, no debate on first or second please ;)] that gets your attention is House Rent Allowance or HRA. Not to stretch this any further, let me head straight to the discussion on HRA.

Before we proceed to any analysis, let us begin with the fundamentals of HRA :

HRA is defined as an allowance paid by an employer to his employee, in order to help him/her meet the rental expenses of his/her accommodation. Therefore, the HRA is an integral part of your salary and warrants proper scrutiny before acceptance of the offer/hike etc.

Time to tax your brain (A bit only)

Though the Income Tax Department might be treacherous on many occasions, it is kind enough when it comes to HRA. The Income Tax Act of India provides for deduction of HRA, while calculating income under head ‘Income from Salary’. As I mentioned above, the HRA is a part of your salary and like the other components of salary, it is taxable under the act. However, the Act allows for certain deduction under the HRA component i.e the amount you do not have to pay tax on. This particular deduction is calculated as:

MINIMUM of

(I) Actual house rent allowance received from the employer;

(II) Actual house rent paid minus 10% of basic salary

(III) 50% of your basic salary, if you live in a metro city (40% for non-metro).

Yay! So, now you have understood the quantum of deduction available (I would suggest memorizing this schedule so that, it is handy when you require it).

However, as most of the flowery things in life come with *terms and conditions*, then why not HRA. So, here are certain T&C that you need to keep in mind when it comes to HRA.

– HRA has to be received from the employer,

– Rent has to be paid (Duh, isn’t that obvious)

– Salary means basic salary plus dearness allowance,

As you would know, India is a land that loves myths and misconceptions. Again, why not with HRA. So, let me try and bust these misconceptions:

1. HRA is available to both salaried as well as self-employed individuals.

No. There are certain benefits that are available to self-employed individuals under section 80GG of Income Tax Act, subject to fulfilment of certain conditions which may resemble HRA, but the terms cannot be used interchangeably.

    2. Claiming deduction of both HRA and home loan principal/interest payments.

Smile because it’s a YES. It is possible to effect such an arrangement with a tinge of astute tax planning skills. So, this is when you can leverage such an arrangement:

• You can pay rent to your parents and claim HRA, while claiming for home loan principal/interest payment on the same house. However, please make sure that your parents show parallel rental income in their IT returns. Additionally, there has to be a proper rent agreement between you and your folks.
• You can let out your own house and stay at the rented house, therefore, claim HRA for rented house and home loan principal/interest payment for the owned property. In this case, you will have to show the rental income from let-out property in your return.
• In a genuine case, you can have a self-owned property and at the same time, stay in a rented house. Now, this is possible if both the houses are located in different cities or if in the same city, the owned house is far away from your workplace, making it difficult to commute. In the latter case, you may take a house on rent near your workplace. But beware, if you pay rent to your spouse, you may face difficulties if scrutinized (see, even the government wants couples to be at peace).

Well, give a clap to yourself. You have patiently gone through the article and that too without yawning for once (See, I drink bournvita for such confidence).

You can reach out to fintuned.in@gmail.com for any queries/clarifications/jokes etc.

Cheers.