House Rent Allowance (HRA) – Tax Exemption | HRA Calculation | Rules

Ever wondered what that little row called HRA in your salary slip stands for? And no, we’re not asking you the full-form of it. HRA is the abbreviated version of House Rent Allowance and almost everyone knows about this at least.

What we’re asking here is if you have an in-depth knowledge about how HRA impacts your tax liability and its general importance in your salary slip. 

If your answer is no, then tighten your seat belts. We’re in for a ride down the HRA lane, discussing the various aspects of it on the way and also how to calculate HRA for tax deduction.

What is House Rent Allowance (HRA)?

House Rent Allowance or HRA, is the amount paid by an employer to the employee in order to compensate for the house rent he / she pays. It is paid as a part of your salary and offers you tax benefits along with the obvious compensation for your house rent. 

Factors that Determine HRA

There are mainly two important factors that help in deciding the HRA an employee gets. They are :-

• Basic Salary: The amount of salary you get helps in determining the HRA that your employer pays you. While calculating the HRA, the “salary” includes the basic pay, Dearness allowance and other commissions that are part of your larger salary slip.

• City of residence: Your HRA also depends on your city of residence. For example, if you live in any of the metro cities you will be given 50% of your salary as HRA. However, in case you reside outside of the metro cities you will be given only 40% of your salary. Similar to the above, the “salary” here includes the basic pay, dearness allowance and other commissions.

Who Can Claim HRA?

1. As a salaried employee you are entitled to claim HRA when you are living in a rented accommodation. 
2. Sometimes an employee has a rented accommodation in the city he / she is working in while simultaneously paying home loan in another city. Such an employee is still eligible for claiming HRA. 
3. In case you stay with your parents, you are eligible to pay rent to your parents and collect a receipt for HRA claim. You aren’t allowed to claim HRA in case your spouse owns the house.
4. 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.

Benefits of HRA

The biggest and sufficient benefit of HRA is that it helps in reducing your Taxable Income and thus, helps you in saving Income Tax. But it is important to understand that you can only claim a part of your whole rental expenses and not full, depending on certain conditions. 

Your HRA exemption will be based on the least of the below mentioned options:

1. 1. The entire amount allotted by the employer as the HRA, in your salary slip.
   2. Actual rent that you pay minus 10% of the basic salary.
   3. 50% of the basic salary, if you’re staying in a metro city (Delhi, Chennai, Kolkata or Mumbai) and 40% if you reside in a non-metro.

The taxpayer will be required to file his / her rent receipts in order to avail tax exemption on HRA. 

An important aspect to claiming tax rebates on HRA is that if the rent you pay is more than 1 lakh annually then you’re supposed to submit the PAN details of your landlord. In case, your landlord doesn’t have a PAN card, he / she can issue a self-declaration in place of it.

How to Calculate HRA for Tax Exemption (metro city)

Let’s take a fictional character by the name of Chetna Bajpai and have a look at here salary slip.

Total Earnings of Ms Chetna: Rs. 55,350

Amount of actual rent paid monthly: Rs. 10,000

Now,

• Her basic salary is Rs. 30,000 per month, which will be considered since there is no commission or dearness allowance.
• HRA, given by her employer, is Rs. 13,000 per month.
• 10% of the annual basic salary = 10% of Rs. (30,000 X 12) = Rs. 36,000

For HRA calculation, we follow the three methods that have been discussed before.

1. 1. 1. HRA amount = Rs. 13,000 X 12 (months) = Rs. 1,56,000
      2. Actual rent paid minus 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
      3. 50% of basic salary since she lives in a metro = Rs. 1,80,000

Out of the above three, the minimum amount which is Rs. 84,000 will be the amount that will be exempted from tax deductions. This is how the process of Tax exemption on HRA works.

These topics covers majorly all points in relation to HRA. In case of any other queries regarding HRA, do ping us in the comments section.