Best Way to Calculate Your HRA (House Rent Allowance)

*Please note that the quotes shown will be from our partners

Whether you are a salaried person or self-employed, you always look for various ways to exempt from paying tax. When the different sections of Income Tax Act help the salaried individuals to save on tax by introducing a fraction of ways, House Rent Allowance (HRA) has been considered as an easy-to-claim process, to bring down your tax liabilities. So, it is prudent to know how to calculate HRA  so that you can enjoy a maximum of tax benefits.

House Rent Allowance (HRA)

The actual salary of a person is a combination of few components. HRA is one of the sub-components of the salary. It can be fixed or derived as per the mutual consideration of both employee and employer. The foremost condition here is that an HRA is payable only if the employee stays in a rented residential premises or he/she doesn’t own that property.

The calculation of HRA is influenced by a few factors like-

  • It is given by the employer and not a right of the employee
  • 50% of the employee salary if he/she resides in any metro cities of India like Delhi, Mumbai, Chennai or Kolkata
  • 40% of the salary if the employee lives in cities other than metropolitan cities
  • Actual rent paid minus 10% of the salary

HRA Calculation

To make you understand the calculation, we are taking an example of Mr. Ramesh who lives in Delhi and drawing a salary INR 54, 250 monthly. He is paying rent of INR 10, 000 per month. From his payslip, we can calculate his HRA that is exempt from income tax-

 

Name

Joining Date

Employee ID

PF No

Category

Ramesh Kumar

21/12/2015

1223

SB/AYE/7654323/123/4567297

Salaried

Basic

30,000

PF

2,000

 

HRA

13,000

Professional Tax

200

 

Conveyance

2,000

 

 

 

Special Allowance

3,000

 

 

 

Medical

1,2000

 

 

 

LTA

5,000

 

 

 

Total earning

54,250

 

 

 

 

Ramesh tax exempted HRA will be:

Salary 30,000 (basic salary) HRA provided by the organisation- 13,000 per month 10% of basic salary- INR 36,000

  • Annually received HRA from employer=INR 13,000x12= INR 1,56,000
  • Actual rent paid minus 10% of basic=(10,000x12)- INR 36,000= INR 84,000
  • 50% of basic salary as he resides in a metro city= (15000x12)= 1,80,000

If we analyse, the least amount in this calculation is 84,000, so it is the HRA of Ramesh which will be exempted from tax.

Conditions for Claiming Tax Exemption on HRA

  • You can claim a tax benefit of HRA along with a home loan, in case your own house is rented out or you work in a different city
  • If you are staying with your parents, you can pay rent to your parents and collect a receipt for HRA claim. However, the rules don't allow you to pay rent to your spouse.
  • In case, if the rent exceeds INR 10,000, the PAN card of the landlord is mandatory to produce top claim HRA. If the landlord doesn't own a PAN card he/she can provide a self-declaration.
  • One must deduct 30% tax from the rent amount that needs to be declared if the landlord is an NRI
  • Apart from a father, if the rent is paid to any other family member, HRA and tax exemption can be claimed, provided the rent is to be paid on regular monthly basis
  • In case of change in the location or change in salary, the HRA tax will be calculated on monthly basis 

Documents Required to Claim Tax Exemption on HRA

  • If the rent amount exceeds INR 1 lakh, the employee will have to produce landlord’s PAN card
  • The rent receipt
  • A revenue stamp
  • Signature of the landlord on the revenue stamp
  • 4 rent receipts as one receipt can be used for a period of 3 months. Hence, for a year. You will need at least 4
  • Xerox copy of the rent agreement 

The biggest benefit of House Rent Allowance is that it provides an option to reduce the taxable amount. However, the current financial year will see certain changes in terms of HRA as well. Going forward each and every document produced by the taxpayer will be examined well and a taxman may ask you for proof of rent agreement or something related to it.

If you are a working individual and living in a rented accommodation, you can claim for HRA exemption, if it is a part of your salary. So, knowing your HRA circle is must as a salaried person to enjoy the maximum benefit out of it.

Collapse

Most Searched Topics

GET ARTICLE ON EMAIL