How to calculate HRA?

HRA is only applicable in an employer-employee relationship and not applicable for professionals and independent businessmen. Here are 5 HRA calculation rules you must know about HRA as part of your salary package.

Feb 26, 2020 11:02 IST India Infoline News Service

HRA is normally part of most pay packages. If you are staying in a rented accommodation, then HRA can be extremely tax efficient. The idea behind house rent allowance (HRA) is to reduce the effective burden of rent payments by giving you a tax break on the same. HRA is only applicable in an employer-employee relationship and not applicable for professionals and independent businessmen. HRA calculation and taxation is governed by Section 10(13A) of the Income Tax Act.
 
Five things to know about HRA

Here are 5 HRA calculation rules you must know about HRA as part of your salary package.
  • HRA at 50% of salary is applicable only for metros; for all other cities and towns the HRA is applicable at 40% of salary only.
  • For the purpose of HRA calculation, salary is defined as the sum of basic salary, dearness allowances and any other commissions (whether fixed or variable).
  • To be eligible for HRA benefit, the actual rent paid should be less than 10% of the basic salary (excluding DA and commissions).
  • At no point of time can the HRA exemption claimed be more than the actual HRA received by the employee. There is no concept of HRA carry forward.
  • If you own an apartment in one city and live in another city, you can claim HRA and Section 24 benefits on interest on home loan at the same time.
 
How to calculate the HRA exemption
The previous paragraph broadly outlines how the eligible HRA is calculated. Here we can look at the actual calculation of exempt HRA based on a live example of Harshad Patel. Let us assume the following salary information for the purpose of calculating Harshad’s HRA component that is exempt from Income Tax.
 
Harshad works for Townsend Ltd and earns a basic salary of Rs40,000 per month. He does not earn any DA or commissions. In addition, the company also provides him with HRA to the tune of Rs18,000 per month. He pays rent of Rs15,000 for his 1 BHK apartment in Navi Mumbai. Here is how his HRA exempt calculation will look like.
 
Calculating exempt HRA

The exempt HRA amount will be the minimum of the 3 items below.
  1. Actual HRA received from employer = Rs18,000 X 12 (months) = Rs2,16,000
  2. Actual rent paid minus 10% of basic = Rs180,000 - Rs48,000 = Rs1,32,000
  3. 50% of basic salary since he lives in Navi Mumbai = Rs2,40,000
 
The lowest of the above 3 items is Rs132,000 and that will be the eligible exemption. So out of his HRA of Rs2,16,000; the basic exemption of Rs1,32,000 will be applied and the balance Rs84,000 will be added to his taxable income and the income will be taxed at his normal rates.
 
7 important HRA exemption rules to make your tax returns smooth

While the calculations are all well and good, here are some basic ground rules that need to be remembered to be eligible to claim HRA benefits.
  1. HRA can be claimed even if you are living with your parents and paying them rent. However, similar benefit cannot be claimed if you are staying in your spouse’s house
  2. All HRA claims must be backed by rent receipts. Stamped receipts must be insisted for on a month-wise basis to claim HRA
  3. If annual rent exceeds Rs1 lakh per year, then landlord’s PAN needs to be furnished in the income tax returns, else the HRA claim is liable to be rejected
  4. In most of the larger metros, employers will insist on a copy of the registered leave and license agreement along with the rent receipts to process HRA in payroll
  5. If the total rent exceeds Rs6 lakhs per year, TDS has to be deducted before paying rent to the landlord. Such amounts must be deposited within the statutory due dates with reference to the landlord’s PAN
  6. HRA only refers to the rental amount as per the contract and does not include the maintenance charges paid or the electricity charges paid. They are not eligible.
  7. In case landlord is an NRI, onus is on the tenant to deduct TDS at 30% before paying the rent. HRA claims can be rejected if this is not adhered to.
 
HRA offers a simple and effective means of reducing your tax burden. Just ensure that you get your documentation right to avoid any last minute surprises.

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