HOUSE RENT ALLOWANCE

(13A) any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed55having regard to the area or place in which such accommodation is situated and other relevant considerations.

—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where—
the residential accommodation occupied by the assessee is owned by him; or
the assessee has not incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him
Who can avail HRA
This tax benefit is available only to the salaried individuals (opting for the old tax regime) who have the HRA component as part of their salary structure and is staying in rented accommodation.
Self-employed professionals cannot avail of this deduction.

How much is tax-exempt?

The tax exemption for HRA is the minimum of:

i) Actual HRA received
ii) 50% of salary if living in metro cities, or 40% for non-metro cities; and
iii) Excess of rent paid annually over 10% of annual salary for calculation purposes, the salary considered is ‘basic salary’. In case ‘Dearness Allowance (DA)’ (if it forms a part of retirement benefits) and ‘commission received based on sales turnover’ is applicable, they too are added to compute the minimum HRA exemption available.
The tax benefit is available to the person only for the period in which the rented house is occupied.

Example of HRA calculation :

Let’s say an individual, with a monthly basic salary of Rs 55,000, receives HRA of Rs 15000 and pays Rs 9800 rent for accommodation in a metro city. The tax rate applicable to the individual is 20 percent on his income under the old tax regime.
To avail of HRA benefit, the least of the following amount (yearly) is exempted, the rest is taxable:
i) Actual HRA received = Rs 180,000 (15000 x 12)
ii) 50% of salary (metro city) = Rs 330,000 (50% of Rs (55,000 x 12 = 660,000))
iii) Excess of rent paid annually over 10% of annual salary = Rs 51,600 (Rs 117600* – (10% of Rs 660000))
*9800X12 = 117600

It shows that of Rs 180,000 received as HRA, Rs 51,600 gets tax exemption and only the balance of Rs 128400 gets added to the employee’s income.
Documents For Claiming HRA :
HRA exemptions can be availed only on submission of rent receipts or the rent agreement with the house owner. An employee must report the PAN of the ‘landlord’ to the employer if the rent paid is more than Rs 1,00,000 annually to avail of the tax benefit. Paying rent to family members
The rented premises must not be owned by the person claiming the tax exemption. So if you stay with your parents and pay rent to them then you can claim that for tax exemption under HRA. However, you cannot pay rent to your spouse. As, in the view of the relationship, you are supposed to take the accommodation together.
Even if you are renting the house from your parents, make sure you have documentary evidence as proof that financial transactions regarding your tenancy take place between you and your parent. So keep a record of banking transactions and rent receipts because your claim can get rejected by the tax department if they are not convinced by the authenticity of the transactions. Previously, there has been an instance in which the HRA claim of a salaried taxpayer was rejected by the Mumbai income tax.