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House Rent Allowance (HRA) is the allowance you receive from your employer towards the rent of your house. It forms a part of the salary paid to you by your employer.

HRA depends on multiple factors, such as your salary, city of residence, company’s salary structure, and more. Generally, HRA is a fixed percentage of your basic salary. You can claim a tax exemption on your HRA under Section 10(13A) and Rule 2A of the Income Tax Act, 1961.

The exemption on HRA is calculated as per 2A of the Income Tax Rules. As per Rule 2A, the least of the following is exempted from salary under Section 10(13A) and does not form part of the taxable income.

1. Actual HRA received from the employer
2. For those living in metro cities: 50% of (Basic salary + Dearness allowance)
3. For those living in non-metro cities: 40% of (Basic salary + Dearness allowance)
4. Actual rent paid minus 10% of (Basic salary + Dearness allowance)

If the payment of rental expenses is more than ₹ 1,00,000/- annually, then it is mandatory for the employee to provide the PAN number of the landlord while filing income tax returns.

Let us understand the HRA component that would be exempt from income tax through an example

Mr X, employed in Mumbai, has taken up an accommodation on rent for which he pays a monthly rent of ₹ 25,000/-. He receives a Basic Salary of ₹ 45,000/- monthly along with DA of ₹ 7,000/- monthly which forms a part of the salary. He also receives HRA of ₹ 1 lakh from his employer during the year.

Hence, ₹ 1,00,000/- would be exempt from salary under Section 10(13A).

Also, if the employee is paying rental expenses but does not receive HRA allowance as a part of salary from the employer or if the person is paying rental expenses but does not have salary income, the benefit of paying rental expenses can still be claimed under Section 80GG of the Income Tax Act, 1961.

Below are some HRA rules for self-employed individuals:

1. Self-employed individuals cannot generally claim HRA as this provision is valid only for salaried employees
2. Self-employed individuals can claim the tax deduction on HRA under Section 80GG of the Income Tax Act, 1961, if the rent paid is a business expense. However, they should not own residential property in the same location or receive HRA from an employer to claim the tax deduction
3. They can claim a tax deduction of ₹ 5,000 per month or 25% of the total income, whichever is lower under Section 80GG
4. Self-employed individuals must submit the rent agreement as proof to claim the tax deduction
5. The tax deduction can be claimed while filing the Income Tax Return (ITR)
6. Tax deductions for self-employed individuals under Section 80GG are subject to the prevailing tax laws and may change over time. It is recommended to consult a tax advisor for further details.