Are you curious about how House Rent Allowance (HRA) can impact your income tax and savings? This guide breaks down everything you need to know, from HRA exemption in income tax to calculating HRA and understanding the limits.
Think of HRA exemption as a special tax perk. When you earn money, the government says, “If you allocate a portion of your earnings to cover your house rent expenses, we will exempt that portion from taxation.” It's like a win-win – you save on taxes and have more to put towards your living expenses. So, let's dive into this financial hack that can help you maximise your income tax savings.
Who can avail HRA tax benefit?
Now, let's talk about who can enjoy the HRA tax benefit. If you're a salaried individual and you pay rent for your accommodation, you're in luck. Typically, to avail of the HRA tax benefit, you must be living in a rented house and receiving HRA as a part of your salary package. This benefit isn't available for those who own their homes or don't receive HRA from their employers.
The details of maximum HRA exemption
Now, there's a limit to this tax-saving benefit. The maximum HRA exemption is the lowest of these three:
- The actual HRA you receive from your employer.
- The rent you pay is minus 10% of your basic salary.
- 50% of your basic salary in case you are living in a metro city.
- 40% of your basic salary if you're not in a metro city.
Let's say your actual HRA is ?20,000, and you pay ?15,000 as rent. Your basic salary is ?50,000. So, here's how you calculate it:
- 10% of your basic salary: ?50,000 * 10% = ?5,000.
- 50% of your basic salary: ?50,000 * 50% = ?25,000.
In this case, the lowest amount is ?5,000 (10% of your basic salary). So, your HRA exemption limit is up to ?5,000.
How to calculate HRA
The calculation of HRA is determined by multiple factors. Factors influencing HRA are:
- Salary
- Rent paid
- HRA receivable by the employee
- City of residence of employee
Calculating HRA exemption can be done in a few simple steps:
- Find out how much HRA you get from your employer.
- Calculate the rent you pay for your accommodation.
- Determine 10% of your basic salary.
- Calculate 50% (or 40% for non-metro cities) of your basic salary.
- Finally, compare these three numbers and pick the lowest one as your HRA exemption.
How to claim HRA in ITR
Claiming HRA (House Rent Allowance) in your income tax returns (ITR) is a straightforward process. Here's how you can do it:
1. Collect the Required Documents
Ensure you have all the necessary documents, such as rent receipts, rental agreement, and salary slips, which show the HRA component.
2. Calculate HRA Exemption
Use the method we discussed earlier to calculate your HRA exemption. Compare the actual HRA received to the calculated exemption limit.
3. Fill Out ITR Form
While filling out your ITR form, you'll find a section for claiming deductions under Section 10(13A) for HRA. Provide details of your salary, including the HRA received.
4. Declare Exempted HRA
In the ITR form, you'll be asked to declare the exempted HRA amount. This is the lower of the actual HRA received and the calculated exemption limit.
5. File Your ITR
Complete the ITR form as per the instructions provided and submit it online on the Income Tax Department's official website or through other authorised channels.
6. Keep Documents as Proof
Retain copies of your rent receipts, rental agreement, and salary slips for at least 7 years. These documents serve as proof in case the tax department asks for verification.
7. Verification and Assessment
The Income Tax Department may assess your ITR and request additional verification documentation.
How the new indian tax regime impacts HRA
Recently, the Indian tax regime has seen some changes that impact HRA. With the new tax regime's introduction, taxpayers can choose between the old tax regime with deductions like HRA or the new regime with reduced tax rates but no deductions. If you opt for the new regime, you won't be able to claim HRA exemption along with other deductions like Section 80C, 80D, etc. It's essential to evaluate each of the regimes to make smart decisions. Then you can find out what works best for your financial situation and tax-saving goals.
Understanding HRA, its tax benefits, and the impact of tax reforms is crucial for efficient tax planning and financial management. Make sure you stay updated with the latest tax regulations. This will help you optimise your tax-saving strategies.
Boosting your savings with a savings account
A savings account serves as a secure repository for your finances, akin to a modern-day piggy bank with the added convenience of a financial institution. It allows you to deposit and withdraw funds at your convenience, with the bank rewarding you through interest on your balance.
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In a nutshell
To put it briefly, understanding the concept of HRA exemption in income tax can lead to significant savings by lowering your taxable income. Familiarity with HRA calculation and the relevant exemption limit is essential for leveraging HRA benefits. Additionally, when it comes to savings, Kotak811 Digital Savings Account offers a hassle-free and secure way to manage your finances. Keep these financial tips in mind for a more promising financial future!
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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