How-to
HRA
House Rent Allowance (HRA) is a crucial component of an individual's salary. It is the amount the employer allots towards the employee's rented accommodation. HRA benefits employees because it is considered for tax deductions for a particular financial year, which helps reduce your taxable income. The tax benefits associated with HRA apply only to salaried individuals who live in rented accommodation. If you live in your own house, you are not eligible to claim the amount for tax deductions.
The calculation of HRA for tax benefit is based on the following three provisions:
The actual rent that is paid should be less than 10% of the basic salary.
50% of the basic salary if you live in a metro city, or 40% if you live in a non-metro city.
The actual amount allotted by the employer as the HRA.
The least of these amounts is considered for tax deduction on HRA. A few rules apply to HRA claims.
Example:
To understand how to calculate HRA for an employee, consider the example of Mr. Ajay Sharma. Ajay lives in rented accommodation in New Delhi, paying a rent of Rs. 10,000 per month. Here’s what his payslip looks like:
Basic: 30,000
HRA: 13,000
Conveyance: 3,000
Special Allowance: 2,000
Medical expenses: 1,250
LTA: 5,000
Total Earnings: 54,250
PF: 2000
Professional Tax: 200
To calculate the part of Mr. Ajay’s HRA that is exempt from income tax, we have the following information:
His basic salary is Rs. 30,000 per month, which is considered since there is no commission or dearness allowance.
The HRA provided by the company is Rs. 13,000 per month.
10% of the annual basic salary comes to Rs. 36,000.
Now, let’s calculate the amount in the following three scenarios:
Amount received as HRA from employer = Rs. 13,000 X 12 (months) = Rs. 1,56,000
Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
50% of basic salary since he lives in a metro = Rs. 1,80,000
Based on the above calculation, the HRA amount exempt from tax for Mr. Ajay is Rs. 84,000, as it is the least of the three amounts above.
A major benefit of house rent allowance is that it reduces your taxable income, which in turn reduces the tax you have to pay.