Things you need to know about House Rent Allowance (HRA)

Home Rent Allowance

If you’ve been hired recently, you might be wondering what’s HRA i.e. house rent allowance in your salary slip. House Rent Allowance or HRA is the sum that employers pay their employees as part of their salary in lieu of the expenses incurred in accommodation. HRA is added separated from the basic salary to provide tax benefits to the employee. Now, how much HRA is provided to an employee that’s entirely the decision of the employer taking into consideration how much is the basic salary and the living cost of the residence. Let’s see in details how HRA is calculated or you may use an HRA Calculator.

Deciding the House Rent Allowance (HRA)

HRA is mainly calculated based on the basic salary. Though, there are several other factors which influence how an HRA calculator will calculate the HRA. One of the most important factors is the area of residence. For instance, if the employee stays in a metro city s/he is entitled to HRA amounting to 50% of salary. While, if the residence is in another city apart from metros, then the amount reduces to 40%. So, let’s see how HRA calculator works.

To calculate HRA, the first salary is defined as the total of the basic salary, dearness allowance and other commissions. In case, there is no other commission or dearness allowance, the HRA is calculated against basic salary, 40-50%.

Eventually, tax exemption on HRA, given to the employee is the minimum among the following:

  • Actual rent paid minus 10% of the basic salary.
  • 50% of the basic salary in metro cities, 40% in other cities.
  • Final sum received as HRA from the employer

The least of the aforementioned amount will be considered for tax deduction from HRA.

HRA is regulated under section 10(13A) of the IT act, thus it plays a crucial role in the salaried individuals in India. This amount offered to the employee as HRA against the rent paid is eligible for tax deductions for that financial year. Eventually, HRA helps in lowering the taxable income. However, the tax benefits are only available to those who are actually staying in rented accommodation. If the employee stays in a self-owned house, she or he cannot claim tax benefits.

Let’s understand how HRA calculator will calculate the HRA with an example:

Suppose Mr A resides in Delhi, has a basic salary of 30,000. He lives in rented accommodation and pays rent of 10,000 per month. So, his payslip should look like the following

Basic 30000    
HRA 13000 PF 2000
Conveyance 3000 Professional Tax 200
Special Allowances 2000    
Medical expenses 1250    
LTA 5000    
Total 54250    

 

Now, to calculate the tax exemption, let’s consider the three scenarios:

  1. HRA received from the employer: 13000 x 12 = Rs. 156,000.
  2. Actual rent paid – 10% of basic: (10000 x 12) – 36000 = Rs. 84,000
  3. 50% of basic salary (for metros) = Rs. 180,000

The minimum among the following is the second scenario, thus final tax exemption will be Rs. 84,000.

Things to keep in mind when claiming for HRA exemption

The following rules are applicable for claiming HRA benefits-

  1. Allotted HRA cannot exceed 50% of the basic salary.
  2. Actual tax exemption on HRA, given to the employee is the minimum among the following:
  1. Actual rent paid minus 10% of the basic salary.
  2. 50% of the basic salary in metros, 40% in other cities.
  3. Final sum received as HRA from the employer
  1. You can claim the tax benefits of HRA alongside the benefits from a home loan.
  2. If you’re staying at your parent’s house, you may pay rent to them and receive HRA tax benefits. However, you cannot pay rent to your spouse to claim tax benefits.
  3. In case, the rent paid is more than Rs. 1,00,000, it’s mandatory to present the landlord’s PAN card. In case the PAN card is not available, a self-declaration will also work.
  4. Lastly, if the landlord is an NRI, you have to deduct 30% of the rent as tax and declare it as TDS.

Conclusion

The biggest benefit of House Rent Allowance is that it can help you reduce your taxable income, thus take advantage of actual income tax paid. Thus, you can use an HRA calculator to calculate how much benefit you can claim and improve your savings.