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.
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.
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