"House rent allowance" is a financial term used in India, but not common in the U.S. This term refers to a tax-exempt portion of a worker's salary designated specifically for renting living quarters. In the U.S., your employer may pay you a house rent allowance for certain types of work, but it is not likely to be tax-exempt or recognized by the Internal Revenue Service.
HRA in India
Three potential calculations for a house rent allowance in India exist, and the exception is always the lowest number found by these three methods. The first method involves taking the actual rent paid minus 10 percent of your salary. The second method sets the exemption at 40 or 50 percent of your salary, depending on your location. The third method is based on a specific rent allowance provided by an employer.
If you are a salaried employee in India, you can only claim a deduction or exemption for an house rent allowance if your employer designated the allowance and you are personally paying rent for your living quarters. Payments to a spouse do not qualify, but rent payments to parents are acceptable if you are living in their home. The rent must also be more than 10 percent of your salary, and you must provide rent receipts to your employer for the deduction.
Rent Allowance in the U.S.
You may occasionally see the term "house rent allowance" in the U.S., particularly for employees who move from place to place for job requirements. For example, if your work requires spending several months in one location, then several months in another location, part of your salary may be designated as a housing rent allowance and subject to different taxation from the remaining income. This helps employees who cannot establish steady households on their own due to the transitory nature of their jobs.
If you have an employer-designated house rent allowance, talk with a certified tax professional to find out how it may apply to your income tax deductions. Deductibility may vary according to the nature of the allowance and your location. For example, if you find the housing yourself but the employer pays your landlord directly, different exemptions apply than if you receive the money and pay the landlord.
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