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HRA Calculation – How to Calculate Exemption

HRA Calculation

House Rent Allowance (HRA) is a standard part of many people’s salaries. It’s money given to employees by their employers to help cover the cost of renting a home.

Read further to learn how to calculate HRA and HRA Exemption.

What is HRA?

HRA is a significant part of an employee’s compensation and helps cover rental expenses. Employees may be eligible for tax savings on HRA based on their salary structure, actual salary, and city of residence.

HRA depends on an individual’s salary, location, their company’s salary structure, etc. Typically, HRA is a fixed part of the basic salary. An individual can claim an exemption on HRA under Section 10(13A) and Rule 2A of the Income Tax Act of 1961.

How to Calculate HRA?

Employees’ income in public and private sectors is typically structured with various components designated for different purposes. House Rent Allowance (HRA) plays a significant role among these components. The HRA amount may be predetermined or negotiated through a specific arrangement between the individual and their employer.

The amount of HRA that can be exempt is calculated using the following  formula:

  • The actual amount of HRA the employee receives.
  • 50% of the basic pay if the employee resides in a metropolitan city.
  • 40% of the basic pay if the employee lives in a non-metropolitan city.
  • Rent paid by the employee – 10% of the basic pay.

The least amount among the above is considered exempt from the taxable salary.

Example of HRA Calculation

Priya receives a monthly HRA of Rs. 20,000 while living in a metro city. Her basic pay is Rs. 40,000 per month, and she pays Rs. 15,000 per month for accommodation.

To calculate HRA exemption, Priya needs to consider three scenarios and select the one with the least amount:

  • The actual HRA received is Rs. 20,000 per month.
  • Rent Paid – 10% of Salary: Rent paid (Rs. 15,000) – 10% of your salary (10% of Rs. 40,000 = Rs. 4,000) = Rs. 11,000.
  • 50% of Salary (in a metro city): 50% of Rs. 40,000 = Rs. 20,000.

In this case, the least amount of these three scenarios is Rs. 11,000. Therefore, Priya has an exemption of Rs. 11,000 per month.

Priya’s taxable HRA is the actual HRA received minus the exemption: Rs. 20,000 – Rs. 11,000 = Rs. 9,000 monthly. This amount will be added to her taxable income for income tax calculation.

Documents Required to Claim HRA Exemption

It depends on the following:

  • If an individual’s monthly rent is below Rs. 3,000 – No rent receipts are required.
  • If an individual’s monthly rent exceeds Rs. 3,000 – Rent receipts must be submitted.
  • The landlord’s PAN is also required if an individual’s monthly rent exceeds Rs. 8,333. If the landlord does not have a PAN, the landlord has to submit a declaration.

Eligibility to Claim HRA Exemption

You need to meet the following criteria to be eligible for HRA exemption:

  • You must be a salaried individual receiving a House Rent Allowance (HRA) as part of your compensation package to be eligible for this exemption. Those who are self-employed or do not receive HRA in their salary are not entitled to avail of this exemption.
  • You must pay rent for your residential accommodation. If you live in a house you own, HRA exemption does not apply.
  • Your salary structure should include HRA as a component. Your employer must provide HRA, which should be specified in your pay slip.
  • You must be making actual rent payments for your accommodation. The rent should be paid for the house you reside in, and you should have documentary evidence of these payments.
  • The house you rent should be in a city, town, or area where HRA is available. HRA exemption can vary based on the location.
  • You should not own a house in the city where you claim HRA exemption. If you own a home in another city and live in a rented accommodation, you can claim the exemption for rent payment.
  • HRA exemption is a part of the taxable salary, so you must declare your HRA as income while filing your income tax return.
  • To claim the exemption, you must give rent receipts or a rental agreement to your employer as evidence of rent payment. You should also have your landlord’s PAN for rent payments exceeding Rs. 1 lakh annually.
  • The HRA exemption is computed based on the least amount of – the actual HRA received, rent paid minus 10% of your salary or 50% of your salary (in a metro city) or 40% (in a non-metro city).
  • You must submit your rent receipts and any required documents to your employer to claim HRA exemption.

House Rent Allowance rules for the Self-Employed

The HRA rules for the self-employed are as follows:

  • This provision is only valid for salaried employees; self-employed individuals cannot claim HRA.
  • If the rent paid is a business expense, self-employed individuals can claim HRA exemption under Section 80GG of the Income Tax Act. However, they must not possess residential property in the precise location, nor should they receive HRA from an employer.
  • They can claim an exemption of Rs. 5,000 per month or 25% of total income, whichever is lower under Section 80GG.
  • Self-employed individuals must submit the rent agreement as proof to claim the tax deduction.
  • The deductions can be claimed when they file their ITR.
  • Deductions for self-employed individuals under Section 80GG depend on the existing tax laws, which may change over time. It is advisable to seek guidance from a tax advisor for the latest details.

Conclusion

Effectively calculating House Rent Allowance (HRA) exemption is essential for maximising your income and optimising tax benefits. As we’ve explored the various factors influencing HRA exemption and the methods to compute it, it becomes evident that a thoughtful approach to this calculation can significantly impact one’s financial well-being. Stay informed, leverage the available exemptions wisely, and empower yourself to maximise your HRA entitlements.

Frequently Asked Questions about House Rent Allowance

You can calculate HRA by [Rent Paid] - 10% of the Basic Salary.

The HRA limit for salary is 50% of the basic salary for individuals residing in metro cities and 40% for individuals living in non-metro cities.

50% of the employee's basic salary if they live in a metropolitan area (Delhi, Mumbai, Kolkata, or Chennai), or 40% if they live in a non-metropolitan area. The rent the employee pays minus 10% of the employee's basic salary.

The amount of tax deduction that you can over HRA is the least of the following:

  • Actual rent paid minus 10% of the basic salary, or
  • Actual HRA offered by the employer, or
  • 50% of salary when the residential house is situated in a metropolitan city; 40% of pay when the residential home is located in a non-metropolitan city

Many salaried individuals live in their parents' homes, not in rented accommodation. If you are given a house rent allowance and live with your parents, you can still get an exemption by showing that you pay rent to your parents. To avail of this exemption, your parents must own the house and present the rent you give as rental income in their ITR.

If you forget to submit rent receipts to your company HR at proof submission, you can claim HRA when you file your ITR. To claim it, adjust your taxable income to include HRA and calculate the tax payable on the lowered taxable income. You can then claim a refund if excess tax has been deducted.

Your landlord's PAN is mandatory to avail of HRA exemption and pay rent over Rs. 1 lakh yearly.

If you're a homeowner paying back your home loan, you can also claim HRA if you live in a rented property. You are allowed to avail of both benefits to lower your taxable income.

You can claim HRA tax exemption if your landlord is an NRI, but 30% TDS is applicable.

Yes, DA is taken into account when calculating HRA.

HRA tax benefits cannot be claimed by paying rent to your spouse.

Maintenance fees are not considered a property owner's earnings. Therefore, there is no exemption for such expenses. The same goes for electric costs.

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