What is HRA (House Rent Allowance)? | How is HRA Calculated?
Updated on : 2020-Dec-12 16:14:49 | Author :
What is HRA (House Rent Allowance)?
House Rent Allowance or mostly called HRA, is an amount that is paid by employers to employees as a part of their salaries. This is primarily done because it helps give staff with tax benefits towards the payment for accommodations each year. The choice of how much HRA must be paid to the worker is created by the employer on the basis of variety of different criteria like the salary and the city of residence.
Regulated by the provisions of Section 10(13A) of the IT Act, the house rent allowance (HRA) serves to be quite helpful to salaried staff in India.
As per law, only salaried staff will claim HRA and freelance people are exempt from doing the same. HRA, as an exemption is provided, only if the worker resides in rented accommodations. However, additionally just in case the worker lives in his or her own house and doesn't pay any rent, he or she cannot claim HRA to save on taxes.
Basis on which HRA is decided
Primarily, HRA is decided based on the salary. However, there are another factors that conjointly have an effect on HRA, like the town within which the worker resides. Just in case the individual resides in a metro town, then he/she is entitled to an HRA up to 50% of the salary. For cities apart from a metro, the claim is 40% of the salary.
In order to calculate the HRA, the salary is outlined because the sum of the basic pay, dearness allowances and the other commissions. If a worker do not get a commission or a dearness allowance, then the HRA are going to be around 40% - 50% of his/her basic salary.
The actual HRA offered, in all possibility, will be the lowest of the following three provisions:
- The actual rent that is paid should be less than 10% of the basic salary.
- In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a a non-metro city.
- The actual amount received as the HRA from the employer.
How is HRA Calculated?
HRA or The House Rent Allowance is an important part of a person's remuneration. It defines the whole quantity assigned by the employer towards the employee's accommodation as rent. The quantity assigned for HRA proves to be useful for a worker because it is calculated for tax deductions for a specific financial year. HRA conjointly helps in reducing the taxable income that you simply are susceptible to pay. The tax benefits related to HRA are solely applicable for those salaried people who stay in an exceedingly rental accommodation. If a worker stays in his or her own house, he or she isn't eligible to assert the quantity for tax deductions.
Calculation of HRA is based on variety of things, like the claim to 50% of the basic salary, if the worker is residing in a metro town and 40% just in case he/she stays in any other towns. The calculation of HRA for tax benefit is taken into account from any of the subsequent 3 listed provisions:
- The actual rent that is paid should be less than 10% of the basic salary.
- In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a a non-metro city.
- The actual amount allotted by the employer as the HRA.
The least of the said quantity are considered for tax deduction from HRA.
Example: so as to grasp the way to calculate HRA for an employee, allow us to contemplate an example of Mr. Ajay Sharma. Ajay resides in Mumbai in a rented accommodation, paying a rent of Rs. 10,000 per month. Here’s what his payslip appearance like-
|
EMPLOYEE NUMBER- 1008 |
AJAY SHARMA |
AMOUNTS |
|
|
Basic |
30,000 |
PF |
2000 |
|
HRA |
13,000 |
Professional Tax |
200 |
|
Conveyance |
3,000 |
||
|
Special Allowance |
2,000 |
||
|
Medical expenses |
1,250 |
||
|
LTA |
5,000 |
||
|
Total Earnings |
54,250 |
For the aim of calculating Mr. Ajay’s HRA that's exempt from income tax, we've got the subsequent information:
- His basic remuneration is Rs. 30,000 per month, which is able to be considered since there's no commission or dearness allowance
- HRA provided by company is Rs. 13,000 per month
- 10% of the annual basic remuneration comes to Rs. 36,000
Now, let’s calculate the same within the following 3 scenarios:
- Amount received as HRA from employer = Rs. 13,000 X 12 (months) = Rs. 1,56,000
- Or, Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
- 50% of basic salary since he lives in a metro = Rs. 1,80,000
Hence, supported the above calculation, it's evident that the HRA quantity, which can be exempt from tax for Mr. Ajay, will be Rs. 84,000 as that comes to be the smallest amount of the 3 amounts within the eventualities scenarios above.
Claim Rules for HRA
Rules for HRA claims are –
- Your allotted HRA cannot exceed more than 50% of your basic salary.
- As a salaried employee, you cannot claim for the full rental amount you are paying. Your exemption will be based on the below mentioned options:
- The actual amount allotted by the employer as the HRA.
- Actual rent paid less 10% of the basic salary.
- 50% of the basic salary, if the employee is staying in a metro city (40% for a non-metro city).
- You can also avail tax benefits of HRA along with a home loan.
- In case you stay with your parents, you are eligible to pay rent to your parents and collect a receipt for HRA claim. Same rules don't allow you to pay rent to your spouse and claim a tax exemption.
- If the annual rent of your accommodation exceeds Rs.1,00,000, then presenting the landlord's PAN card is mandatory. If the landlord does not have a PAN card, he/she can give a self-declaration.
- Another important rule is that in case your landlord is an NRI, you must deduct 30% tax from the rent amount that needs to be declared.
What are the biggest benefits of HRA?
A major benefit of the house rent allowance (HRA) is that it serves as a medium to reduce the taxable income, which leads to a reduction in the tax that you have to pay.
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