GENERAL

What is House Rent Allowance and How to Calculate HRA?

Simon Hopes

In today’s fast-paced world, where relocation has become a common phenomenon, many individuals find themselves seeking accommodation away from their hometowns. While finding a suitable place to live is crucial, it’s equally important to understand the financial implications of house rent and the benefits it can offer. One such benefit is the House Rent Allowance (HRA), a significant component of many employees’ salary packages.

But what exactly is HRA, and how can one calculate the HRA exemption? If you are a salaried employee you can use Hostbooks HRA calculator to avoid the trouble. Else, read our blog post, we will delve into the intricacies of House Rent Allowance, shedding light on its purpose, the factors influencing its calculation, and the steps involved in determining the HRA exemption.

What is HRA or House Rent Allowance?

An employer provides a House Rent Allowance (HRA) to support an employee’s rented accommodation. Interestingly, even if you are self-employed or your company doesn’t offer HRA, you can still take advantage of this exception. However, there’s a catch: the HRA tax exemption only applies if you reside in a rented house.

Consequently, individuals who own their own homes and receive HRA from their employer are unable to enjoy the advantages of claiming tax deductions under the HRA exemption provision.

How is House Rent Allowance Determined?

  • In a metropolitan city, the Housing Rent Allowance (HRA) you receive amounts to 50% of your basic salary, whereas in any other city, it should be 40% of your basic salary.
  • If you are not entitled to dearness allowance or commissions, your HRA should range from 40% to 50%.

HRA Calculation in Salary

The estimation of your House Rent Allowance (HRA) calculation in your salary can be determined using the following factors:

  1. Subtract 10% of your basic salary from the actual rent paid, in rupees.

Example: If your basic salary is 30,000 rupees and you pay 5,000 rupees in rent, subtract 3,000 rupees (10% of 30,000 rupees) from 5,000 rupees, resulting in 2,000 rupees.

  1. Consider the actual amount of HRA provided to you, in rupees.

Example: If your employer provides you with an HRA of 4,000 rupees, this is the amount you can include for calculations.

  1. Take 50% of your basic salary for a metropolitan city, in rupees.

Example: If your basic salary is 30,000 rupees, half of it would be 15,000 rupees.

The HRA amount eligible for tax deductions is determined by taking the minimum value among these three factors. For instance, if the minimum figure is 2,000 rupees, that is the HRA amount you can claim for tax deductions.

HRA Calculator

HRA, or Housing Rent Allowance, is a portion of an individual’s salary that can reduce their tax liability if they reside in rented accommodation. By utilizing an online HRA calculation tool, you can determine the rebate you are eligible for.

Alternatively, you can manually calculate the HRA rebate, and the income tax India website offers an HRA calculator for this purpose.

If an employee incurs rental expenses exceeding ₹1,00,000 annually, they are required to provide their landlord’s PAN number when filing their tax returns.

In cases where an employee pays rent but does not receive HRA as part of their salary or does not have any income earnings, they can claim the benefits of paying rent under either Section 80GG or the HRA exemption section.

How to Calculate HRA with Example?

  1. Determine the HRA amount: The HRA is typically a percentage of your basic salary. The percentage may vary depending on factors such as your city of residence. Let’s assume the HRA percentage is 50% of your basic salary.
  1. Identify the basic salary: Look at your salary structure to find the basic salary component. For this example, let’s say your basic salary is ₹50,000 per month.
  1. Determine the actual rent paid: Calculate the exact amount you pay as rent for your accommodation. Suppose you pay ₹20,000 per month as rent.
  1. Calculate the HRA exemption: The HRA exemption is the lowest of the following three amounts:

a. Actual HRA received: In this case, it would be 50% of your basic salary (₹50,000 * 50% = ₹25,000).

b. Actual rent paid minus 10% of the basic salary: In this example, it would be (₹20,000 – (₹50,000 * 10%)) = ₹15,000.

c. 40% of the basic salary: In this case, it would be (₹50,000 * 40% = ₹20,000).

  1. Calculate taxable HRA: Subtract the HRA exemption (the lowest value calculated in step 4) from the actual HRA received. In this example, it would be (₹25,000 – ₹15,000 = ₹10,000).

Report HRA in your income tax return: If you receive HRA, include the taxable HRA amount in your income tax return while calculating your total taxable income.

Things to Consider When Making HRA Deductions

Here are some important considerations regarding tax exemptions for House Rent Allowance (HRA):

  1. You are ineligible for HRA tax exemption if you pay rent to your spouse.
  2. Even if you have obtained a home loan, you can still avail HRA exemption in income tax.
  3. If you reside with your parents and pay them rent while obtaining a receipt, you can claim House Rent Allowance.
  4. If your annual salary exceeds ₹1 lakh, it is compulsory to provide the PAN details of your landlord.
  5. When dealing with a Non-Resident Indian (NRI) landlord, a 30% TDS (Tax Deducted at Source) must be deducted from the rent before making the payment.

HRA and City Compensatory Allowance

City Compensatory Allowance (CCA) serves as a form of compensation granted to employees by both public and private companies, aiming to offset the elevated expenses associated with residing in metropolitan or Tier-1 cities. In specific instances, individuals working in Tier-2 locations may also qualify for CCA. This allowance is determined based on an employee’s pay scale and grade, rather than their basic wage, resulting in varying amounts depending on the city. For instance, an employee working in Mumbai would receive a more substantial CCA compared to someone employed in Delhi.

In contrast to House Rent Allowance (HRA) provided by employers to cover rental living costs, City Compensatory Allowance (CCA) is specifically intended to compensate for the exorbitant housing expenses prevalent in metropolises or Tier-1 cities. While individuals can claim a tax exemption of up to ₹1,00,000 for HRA, CCA is subject to full taxation.

Conclusion

HRA (House Rent Allowance) is a salary component for accommodation expenses, and HRA exemption provides tax relief. Understanding HRA and its exemption calculation is vital for optimizing tax savings and increasing take-home salary.