ET Wealth: Smart things to know: Tax deduction on HRA

The content on this page is courtesy Centre for Investment Education and Learning (CIEL).

House rent allowance often forms a part of the salary structure offered to an employee. If one uses the tax benefits available on this component, it helps increase the takehome salary.

Income tax rules allow a deduction from taxable income of the least of the following: a) HRA received; b) 50% of basic salary (if living in a metro, 40% elsewhere) and c) rent paid minus 10% of basic salary.

Since the taxable income is reduced to the least of the three parameters specified above, the tax deducted at source ( TDS) by the employer comes down and increases the takehome salary.

The employer may require rent receipts to support the claim for tax deduction. In some cases, the employer may also ask for the lease agreement. The taxable income is calculated only after taking into account the tax exemption.

If tax exemption for HRA is not claimed by providing the documents and a higher TDS is paid, one has the option of claiming a refund of the excess tax at the time of filing returns by producing the required documents.