Halal Tax Saving by House Rent or HRA

There are certain legal conditions to be met before you can claim HRA deduction/ exemption. I have tried to make it as simple as possible.

But first discuss housing aspect:

1. You or your spouse or your minor child do not own a house. Even if your parents own a house, HRA can be claimed by giving them the rent and which will be part of parent’s income.
2. You own a house in one place and do not live there but live in a different place.
3. You have bought a house but have no possession yet.
4. You have rent receipts or legal agreement for the same.

I have not included home loan conditions above, since I assume a Muslim won’t be taking one.

For HRA to work there are 2 options:

     A.      You receive HRA component in your salary: Section 10 (13A) exemption

     B.      Your don’t receive HRA component or are self-employed: Section 80GG deduction

You can use either of these options, not both.

Basic Definitions used in calculations

Financial Year: A year starting from April 1 of one year and ending at March 31 of next year.

Basic Salary:      Basic component + any Dearness Allowance + any Fixed Commission

Total Income:   Entire amount earned during year minus all tax deductions and exemptions. Amount earned need not be just salary. But any additional perks or income from other sources or financial instruments. Basically just about anything that contributes wealth to your kitty. All tax deductions and tax saving exemptions need to be subtracted except the Section 80GG one for rent.

Section 10 (13A): HRA component in salary.

This is simple enough and is discussed on several sites. The amount of exemption available for a financial year is minimum of the following:

1.       HRA received in salary.

2.       Rent paid minus 10% of Basic Salary.

3.       50% of Basic Salary received for Mumbai, Delhi, Chennai, Kolkata or 40% of Basic for other places.

Section 80GG: No HRA component.

This is minimum of the following for a financial year:

1.       Rs. 24000 (in case deduction is for less than a year, calculate at Rs. 2000 per month).

2.       Rent paid minus 10% of Total Income.

3.       25% of Total Income.

Also in this case an additional Form 10BA has to be furnished. Note here for almost everyone the amount comes to first option only because nowadays, anyone would be a paying a rent of more than Rs. 2000 per month.

Example:

A person living in Delhi receives following:

Basic Salary:      Rs. 10,000 p.m. = Rs. 120,000 p.a.

Total Income:      Rs. 30,000 p.m. = Rs. 360,000 p.a.

Rent Paid:          Rs.   7,000 p.m. = Rs.   84,000 p.a.

If case is of employee getting HRA as part of Total Income,

HRA Received:    Rs.   4,000 p.m. = Rs.  48,000 p.a.

So Section 10 exemption will be minimum of:

1.       HRA received = Rs. 48,000

2.       Rent paid (Rs. 84,000) minus 10% of Basic (Rs. 12,000) = Rs. 72,000

3.       50% of Basic = Rs. 60,000

i.e. Rs. 48,000

In case no HRA, calculation as per Section 80GG:

1.       Rs. 24,000

2.       Rent paid (Rs. 84,000) minus 10% of Total (Rs. 36,000) = Rs. 48,000

3.       25% of Total = Rs. 120,000

So here minimum is Rs. 24,000

Hence note that receiving HRA in salary is always better since using Section 80GG only rent up to Rs. 2000 per month is covered which is extremely less amount.