HRA calculation – What you need to know

HRA (House Rent allowance) is a portion of salary that is paid out to employees by employers as a part of their paycheck. The whole reason for this

HRA (House Rent allowance) is a portion of salary that is paid out to employees by employers as a part of their paycheck. The whole reason for this payout is to help the employees take advantage of certain tax benefits on the payments they make towards the rent for their accommodation. The amount of HRA paid out to the employees depends on factors such as the city of residence and salary bracket.

The house rent allowance is a huge tax benefit for salaried class in India. HRA calculation is regulated by provisions of section 10 (13A) of the Income Tax act.

The law states that this benefit can only be availed by salaried employees. Taxpayers who are self-employed are not covered by this benefit. Also, this facility can only be availed by individuals who live in rented houses. It is important to note that employees who live in their own house and do not have to pay rent are not eligible to claim HRA for saving their taxes.

HRA calculation basics

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The number one deciding factor used for HRA calculation is salary. However, HRA calculation is also affected by various other factors, such as the city where the employee lives. If the employee lives in a metro city, then he/she is eligible to draw an HRA equivalent to 50% of salary. In the case of non-metro cities, this entitlement dips to 40% of salary.

For the purposes of HRA calculation, the salary that is considered is the sum total of basic salary, commissions and DA (Dearness Allowance). The actual HRA calculation is based on the following four factors:

  • The actual money received from the employer as HRA
  • 50% of the salary if you live in a metro city
  • 40% of the salary if you live in a non-metro city
  • The actual amount paid as rent minus 10% of salary

The least of the above amounts can be availed as a tax benefit for HRA when filing your income tax. Also, HRA can be claimed only for the period in which the rented house stays occupied.

Documentation requirements

For the purposes of HRA calculation, it is important to note that you can avail HRA exemption only if you submit the rental agreement you have entered into with the landlord or rent receipts. In case the rent paid to the landlord is in excess of one lac rupees in the financial year, you will need to disclose the PAN card number of the landlord to the employer.

There are some special cases to be considered though:

In case you pay rent to your kin

You cannot be owning the rental premises in order for you to qualify for HRA exemption of the same. So, in case you are staying with your parents and pay the rent then you are allowed to claim tax deductions under HRA. However, you cannot do so if the property is owned by your spouse. This is because you are supposed to be living in the same accommodation together due to the nature of your relationship. Such kinds of transactions may come under scrutiny from the IT department.

If you own a house but live in a different city

You are allowed to avail simultaneous tax deduction benefits available to you for your home loan i.e. for principal repayment and interest portion as well as HRA if your home has been rented out or you are employed in some other city.

If you do not get HRA from your employer but have to pay rent

There are cases where the employer does not include an HRA component as part of the employee’s salary structure. Section 80 (GG) of the Income-tax act helps individuals in such conditions. Individuals who pay rent for accommodation are allowed to claim the deduction for their rental payments under this section of the Income-tax Act, provided they are not paid HRA as a component of their salary by submitting Form 10B.

You can avail the least of the following as exemption from tax under Section 80 GG:

  • Rs. 5000 per month
  • 25% of your total income
  • Rent paid minus 10% of income

So, here are some facts that you need to know when it comes to HRA calculation. Make use of these provisions and maximize your tax savings if you are eligible for HRA exemption.