The government of India has always been committed to the welfare of its citizens. One such measure is that it provides tax exemption on employer-provided accommodation (HRA) to salaried employees. This benefit comes in addition to salary and can be availed by any employee who lives in rented accommodations, whether they are married or single. However, with many youngsters working from home while living with their parents, questions have emerged about claiming HRA if they live at home during this pandemic season? The answer to this is yes.
The following article will help you understand how to claim HRA tax exemption while living with parents during the pandemic.
What is HRA?
HRA stands for House Rent Allowance. It is an important component of a salary structure that is provided by companies to cover the cost of renting a property for residential reasons. Only if you live in a rented property may you be eligible to claim HRA tax benefits. HRA tax deduction is covered by Section 10(13A) of the IT Act, as well as Rule 2A.
Who qualifies for HRA exemption and how is it determined?
HRA is only accessible to salaried employees and is a part of their pay. Partial or full HRA exemption from tax is only available for employees living in rented accommodations. HRA is completely taxed for employees who do not live in rental housing. As a result, one criterion must be satisfied in order to receive a tax HRA benefit:
- Only the exact amount paid as rent by the employee can be claimed as an HRA exemption from tax. This implies that if the rent is not paid, the HRA tax exemption cannot be claimed.
The least of the following amounts is eligible for HRA exemption from tax:
- HRA amount received as a part of salary
- 50% of net income (Basic + DA) for employees residing in metropolitan cities. 40% of net income (Basic + DA) for employees residing outside metropolitan cities.
- Amount paid as rent – 10% of net income (Basic + DA)
According to the rules, if you are living with your parents and you’re not paying any amount as rent to them, you are not eligible for HRA exemption from tax. However, if you’re paying rent to them it is possible to receive a tax deduction.
How to receive a tax deduction while living with your parents?
When HRA exemption can be claimed for an employee living with his or her parents, the tax exemption can be obtained by paying rent to the parents. It should be emphasized that in such a case, the rent received by the parents must be declared as their rental income in their Income Tax Returns.
In actuality, a son or daughter would be less likely to enter into such leasing contracts with their parents. Furthermore, the income tax agency would be on the lookout for such inter-family activities, which might result in inspection and assessments. So, a rental agreement must also be signed and provided as evidence of the transactions.
Rules of HRA exemptions
The following are some guidelines for obtaining HRA exemptions under the Income Tax Act:
- The amount provided by the company as HRA must not surpass 50% of the base pay.
- HRA exemption is not allowed on rents paid to the spouse.
- In the case of the landlord being a Non-Resident Indian (NRI), the employee should deduct and report a 30% TDS on the rent to the Income Tax office.
- Employees must include the HRA exemption in their tax filings.
Paperwork needed to claim HRA exemption
There are various papers that you must provide in order to claim the HRA exemption. The required paperwork includes the following:
- Rental agreement between you and the proprietor of the residence in which you are living.
- The receipts of rent paid for every month for which you are seeking HRA exemption. The receipts need to be cross-signed by the landlord with a revenue stamp attached to all.
- Form 16, provided by the company, to determine the amount of HRA that can be claimed.
- Form 10-BA for seeking HRA exemption under Section 80GG
- If the total rent amount in a fiscal year surpasses 1,00,000 INR, the landlord’s PAN card is needed.
The pandemic has left many people wondering what they are entitled to. If you work from home but live with your parents due to the pandemic, it is important that you know how HRA exemption works for such situations. Our blog gives a detailed overview of the process and which documents need to be submitted along with an application form in order to get this exemption. Stay tuned as we will come up with more updates on other benefits available during these tough times!