House Rent Allowance or HRA is a part of the salary structure. It is paid by the employer to the employee for covering the expenses of accommodation in the city of work. The amount of HRA is decided by the employer based on factors like the city of residence, the amount of basic salary, salary structure, etc.
The tax benefits under House Rent Allowance is governed by Section 10(13A) of the Income Tax Act, 1961. It is an allowance that is quite beneficial to the salaried individuals. Only salaried employees can receive and claim tax benefit on HRA as per the law. Another condition for claiming HRA is that an employee should be living in rented accommodation, if the employee is living in his or her own house, then they can not claim the HRA tax benefit.
HRA Exemption Calculation
Primarily HRA is based on salary. However, other factors like the city of residence, salary structure also plays their part. If the individual is in a metro city, then he/she is entitled to 50% of basic salary as HRA, whereas in case of a non-metro city the HRA has to be 40% of basic salary.
For the purpose of HRA calculation, the salary is defined as the sum total of basic salary, dearness allowance and any other commission. So, the HRA exemption would be lower of the three:
- The actual rent paid minus 10% of basic salary.
- The actual amount received as HRA
- In the case of metro city 50% of HRA, and for non-metro 40% of HRA.
If you are a salaried individual, the HRA is an extremely beneficial part of your salary as it contributes to lowering your tax liability. Let’s take an example to gain a better understanding of HRA exemption calculation.
Example: Let’s say Ajay’ lives in Delhi and receives a basic salary of Rs. 30,000, the HRA is Rs. 15,000, there is a special allowance of Rs. 3,000, and LTA of Rs. 3,500. The total monthly earnings of Ajay will be Rs. 51,500. Ajay pays Rs. 11,000 as rent each month.
Thus, for calculating the HRA that will be exempt for Ajay, the information we need is:
- HRA provided by the employer is Rs. 15,000 per month.
- The basic salary is Rs. 30,000. In the absence of dearness allowance and commission, the same will be considered as salary for calculation.
- 10% of Ajay’s annual basic salary is Rs. 36,000.
- The monthly rent paid by Ajay is Rs. 11,000.
- Ajay lives in Delhi, which is a metro city.
So, now calculate the amount in these three scenarios:
- The actual HRA received from employer = 15,000*12 = Rs. 1,80,000.
- Actual rent paid minus 10% of basic salary = (11,000*12) – (36,000) = Rs. 96,000
- 50% of basic salary = Rs. 1,80,000.
Based on the above calculation, the amount of HRA that will be exempt for Ajay is Rs. 96,000 as it is the lowest amount among the three calculated above.
In case you find the calculation tricky, then you can easily find the HRA exemption amount for yourself by using any online HRA calculator. Also, if you are filing your return through a third party portal, then you need not do any calculation, as all the tough calculations are automatically done at the back-end as you go entering the values in the required form.
