The HRA policy in India deals with the House Rent Allowance. It is the amount paid by the employers to the employees and is included in the salary itself. The main advantage of the HRA policy is that it provides employees with tax benefits for the amount that they pay towards their accommodations on an annual basis. It also reduces the taxable income that you are liable to pay at the end of the financial year while you file your taxes. Thus, according to the provisions of Section 10(13A) of the IT Act, the fixed House Rent Allowance is calculated on a set of fixed criteria. The criteria are as follows:
1) Only individuals who work under another individual or a company can claim these benefits i.e. the individual must be salaried monthly. Those who are self-employed cannot avail the HRA.
2) The individuals who live in rented accommodations can apply for their monthly rent allowance. However, those who reside in their own house cannot do so.
If an individual satisfies the above-mentioned criteria, then the HRA is computed based on certain factors that are flexible with respect to the HRA policy. Since the HRA is computed based on the individual’s salary, the salary is a major deciding factor. Other deciding factors generally include:
1) The place of residence of the individual: If the individual resides in a metropolitan city, then he/she is entitled to an HRA that is equal to 50% of the monthly salary whereas if the individual lives in a non-metropolitan city then he/she is entitled the HRA which is equal to 40% of the monthly salary.
2) The monthly salary mentioned is the sum of the basic salary, the dearness allowance and any other commissions that vary from organization to organization. If however, the individual receives no dearness allowances or commissions, then the HRA is 50% of the basic salary.
3) Another factor that is used to compute the HRA is your actual house rent minus 10% of your basic salary. This amount is used to compute the HRA that the employer gives you as well.
While applying for HRA returns from the employer to the organization, there are certain documents that you need to provide. Firstly, if the total rent that you pay your house owner exceeds rupees 1 lakh annually, then the PAN card details of your house owner must be submitted along with all the relevant documents while filing the HRA claim. You will also have to submit the rental agreement for the current financial year. Apart from this, you will have to submit a stamped rent receipt that is filled either monthly or quarterly. This stamped rent receipt must contain all the details of the rent amount, the complete address of the property and the name and signature of the landlord.
The filing of the HRA claims is, in fact, a simple process that does not involve too much hassle. Depending on the organization, you will have a time frame to submit your relevant documents including the rent receipts to the HR of the company. If you oversee the deadline to do so, the HRA can be claimed directly during the time of filing for your income tax returns. This can be done by including the HRA amount that the company is willing to offer as a part of the taxable income before calculating the payable tax.
While claiming your tax, if you are servicing a home loan on another property, you can still claim the exemptions on the HRA for the house that you are currently living in. The only criteria for this are to make sure that all the necessary documents including the possessions, deeds etc. are all in place. At the same time, if you are renting out another property, then while filing for tax returns, make sure that you specify the rental income that you receive as income from other sources. This has no significant influence on the HRA thus computed but it does on the tax returns that you will obtain at the end of the financial year.