House Rent Allowance (HRA)

What is the Significance of HRA in tax savings?

I think the amount of tax saved through the use of HRA tax planning is more that 80C or commonly known as 1 lac savings. That is the significance and the need for understanding details about HRA.

What is HRA?

Those of you who are earning salaries must know that it is given as a salary component. This is assumed part of salary to take care of your housing expenses. Rent paid by you is allowed to be deducted from the taxable HRA (based on a certain calculation shared in this blog), which saves you taxes.

What is the formula for claiming deductions from taxable HRA or calculating non taxable HRA?

The non taxable HRA is calculated as least of the following 3 calculations:

1. Actual HRA received
2. 50% of Basic Salary in case you reside in Metros (defined metros are only Delhi, Mumbai, Chennai, Kolkata) else 40% of Basic Salary
3. Rent paid minus 10% of Basic Salary

Therefore, if your Basic Salary is Rs.30,000/- p.m. and HRA is Rs.15,000/- p.m. and you pay rent of Rs.12,000/- p.m. in a metro, the exempt HRA would be least of the following:

1. Actual HRA received - Rs.15,000/- p.m.
2. 50% of Basic Salary in case you reside in Metros - Rs. 15,000/- p.m.
3. Rent paid minus 10% of Basic Salary - = Rs. 12,000/- - Rs.3,000/- = Rs. 9,000/-

Hence Rs. 9,000 p.m. would be exempt and Rs. 6,000 p.m. of HRA would be taxable.

What documents are needed for claiming HRA benefits?

Now, all of us struggle to figure out what is the sufficient proof of payment of rent which can be submitted to your company and get you the tax benefits. The requirement may be defined by each company and may very.
However, as a general guideline you can given Rent receipts issued by your landlord as a proof. You may also submit lease agreement with your bank statement copies wherein the rent payments are appearing, in case the physical copies of rent receipts cannot be produced. There is no need to submit any proof of rent payment if your rent is upto Rs. 3,000 p.m.

Do's and Don'ts for claiming HRA

While HRA is the single biggest contributor to saving your taxes, it is also one of the areas where most manipulations appear to happen. While the government has notified last year that any payment of rent of more than Rs. 2,00,000 in FY, the landlord PAN or other proof of identity should be submitted to claim HRA benefits.

The common mistakes I have noticed while claiming HRA are :

1. Fake rent receipts while no actual payment of rent is made.
2. Paying rent to family members but not actually transferring money.
3. Rent paid to family members way above market rates.
4. Paying Rent as well as claiming Housing loan interest benefits within same city (specially when the own house in closer to place of work as compared to rented house).
5. Paying rent to a family member above taxable limits and not filing / showing in their tax returns.

These could prove disastrous if your tax return comes under scrutiny.

While the don'ts mentioned above have the do's hidden in there, a world of advise is that the HRA benefits should be claimed but with proper documentation in place and keeping all legal aspects even for the recipient in mind as in a lot of cases the recipient is a family member.


These are my personal views and cannot be treated as tax advise. Please consult your specific case with a qualified tax adviser before you act on this.

Understanding PAN

For those who are new to taxation and have started earning now, must have heard a lot about PAN (Permanent Account Number). We also fear Taxes specially Income Taxes a lot as we hear that the tax guys  keep a watch over your finances etc. from our elders and seniors.


What is this PAN and what are implications of having a PAN for us? 

Let us understand in a simple to understand language. PAN or Permanent Account Number is your identity for Income Tax purposes. It is like your Income Tax Account number which keeps your record of taxes paid by you or deducted by companies from your salaries and for settling your income tax liabilities.

It has 10 characters with first 5 characters as alphabets, next 4 numbers and last character also a alphabet.

Now the question is - Is this only for filing of Income Tax returns and settling tax liability?

PAN now a days has evolved as a tool for many other purposes. Such as - acceptable proof of identity at almost all places like opening of bank account, getting a Passport etc. to name a few, tool for government to allow many other registrations such as VAT, Service Tax, IEC etc., tool for government to monitor high value transactions such as buying of immovable property (houses etc.). So, getting a PAN is not necessarily for filing tax returns only.

Now another question arises - Is is necessary to file tax returns if you have PAN (you may have to get a PAN because of this being accepted as identity proof or any other reason as mentioned above).

By getting a PAN itself, you do not become liable to file income tax return or pay taxes or become answerable to Income Tax department as is commonly believed. There are separate rules for filing of tax returns and you can safely keep a PAN without either filing a return or pay taxes unless you fall in the category of those who are required to file income tax return as required by Income Tax law in India.

PAN is good for all of us and it is desirable to have it.