Confused whether to keep paying rent or relinquish your HRA benefit? Know these rules and compare your options

Should you pay rent or waive HRA benefi

If you are a working woman employed in an Indian city, there is a possibility that you may have worked (or are still working) from home. Many private sector employers, particularly in the service industry, have found it feasible to let salaried individuals work remotely.

Single women are finding it practical to relocate back to their hometowns, at least temporarily, while still earning their pay check. Married working women, particularly with children, may have had to ensure the convenience of their spouse and children too. But it is safe to say that many Indian working women are probably still working remotely from their hometowns.

Those living in rented houses are facing the dilemma of whether to vacate their city home or continue to pay housing rent. Then there’s the House Rent Allowance (HRA) that they may have to forego if they vacate their rented home. This can lower their HRA tax benefit and inflate their tax liability.

How to decide?

If you have the option of vacating your rented home, you should ask your company if they will entertain your hometown rent receipts. In some cases, the company may not agree to accept rent receipts from any place other than the place of employment. In such a case, your entire HRA allowance becomes taxable while calculating TDS on salary. 

Note that the IT department is not expressly concerned about the location of your rented accommodation when you receive HRA. What Section 10(13A) of the IT Act says is that the rented accommodation must be occupied by the employee, the rent on it must be paid by her, and she must not own the property or part thereof. This section overrules the scepticism of those companies who are unwilling to accept outstation rent receipts. 

However, you have to consider the property ownership aspect as well. If you have relocated to your hometown, chances are that you might be living with your parents, a sibling, or your in-laws. If you are the owner or co-owner of the property, you are automatically ineligible to claim HRA benefits.

Related: How to claim HRA benefits while you work from home?

How your decision will play out

To further aid your decision, let us assume a few scenarios. One situation could be that you continue to pay the rent. Or you could vacate and relocate to your hometown where you don’t own property. In yet another scenario, you might vacate your city home but are not eligible to claim HRA on your parental property.

Particulars  Continue with city home Vacate city home; claim HRA Vacate city home; ineligible for HRA
Can you claim HRA? Yes Yes No
Basic salary 5,00,000 5,00,000 5,00,000
Dearness Allowance 1,00,000 1,00,000 1,00,000
Rent paid 1,80,000 90,000 0
HRA received 2,00,000 2,00,000 2,00,000
HRA taxable 80,000 1,70,000 2,00,000
Taxable Income (2+3+6) 6,80,000 7,70,000 8,00,000
Income Tax 50,440 69,160 75,400

*All amounts in INR

In this example, the income tax liability is lower if you continue to rent the city home. But if you vacate it to relocate to your home town property, you save the entire house rent. 

To keep things simple, we are not considering tax deductions while calculating the total income and sticking to the old tax regime option. The rent paid is assumed to be higher in the city, compared to paying rent to parents or to a landlord in a small town.

How HRA is calculated?

The amount of HRA that can be claimed as tax benefit is the least of, 

  • Actual rent paid MINUS 10% of basic salary, or
  • Actual HRA received,
  • 50% of salary in the four metros, 40% elsewhere.

So, if your basic is Rs 22,000, HRA is 11,000, rent paid is Rs 13,000 and total salary is Rs 50,000, the calculation in a non-metro will look like this,

  • 13,000 - (10% of 22,000) = 10,800 per month = Rs 1,29,600 per annum
  • 11,000 per month = Rs 1,32,000 per annum
  • (40% of 22,000) = Rs 8,800 per month = Rs 1,05,600 per annum

The eligible HRA benefit will be Rs 1,05,600. 

Things to keep in mind

At the above level of income, vacating the city home makes more sense, even if you are not eligible to claim HRA. However, with higher salary and HRA, the tax benefit of vacating will diminish as tax liabilities will also increase. If you have relocated to your hometown, you can enjoy HRA benefits if you pay your rent to your parents. However, do remember that it may increase their tax liability. 

Even if your employer doesn’t consider your hometown HRA claim, you can consider the same while filing your income tax returns and claim the tax deducted as a refund. But you will have to maintain strong documentation, including rent receipts, bank statement, and proof of correspondence, apart from avoiding cash payment of the rent.

With these things in mind, you can decide whether to let go of HRA benefits or retain your workplace accommodation. The benefit of one decision over the other will vary depending on changes in the salary structure and rents. You can compare the scenarios as shown above and identify which is the most cost-effective in your case.  What you must know about HRA to ensure it is not rejected.