Learn all about how to calculate your House Rent Allowance (HRA) and how it can help you get some tax benefits as well.
There’s a good chance you have a lot of things on your mind when you receive your salary every month. If you have Credit Card payments to tend to or EMIs on loans, then you’re probably calculating your monthly expenditure keeping these things in mind. But, amidst all these calculations, you may be ignoring that one component in your salary slip – your HRA or House Rent Allowance
As long as you are paying rent, you can claim tax benefits on the House Rent Allowance component of your salary, while also availing tax benefits on your Home Loan. This could be the case if your own home is rented out or you work from another city etc. However, you need to account for any rental income you receive from the property you own under ‘income from other sources’.
Additional Reading: HRA Exemption And How To Claim It
HRA is provided to salaried people under Section 10 (13A) of the Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules., while self-employed professionals are eligible for tax deductions under section 80GG of Income Tax Act, 1961.
When you are calculating HRA for tax exemption, you need to take into consideration four aspects. This includes salary, HRA received, actual rent paid and where you reside, i.e. if it is a metro or non-metro.
If these aspects remain constant through the year, then tax exemption is calculated as a whole annually. If this is subject to change, as in a rent hike or shift in residence etc, then it is calculated on a monthly basis.
The place of residence is significant in HRA calculation since the tax exemption for HRA in a metro is 50% of the basic salary, while it is 40% for non-metros.
On Paying Rent
It isn’t mandatory that you should pay rent only to a landlord to avail HRA benefits. You can pay rent to your parents or your spouse to claim tax benefits as well. However, they need to account for the same under ‘income from other sources’ and will be entitled to pay tax for the same.
To claim HRA, you’ll need to furnish proof of rent paid through rent receipts to your employer. If you pay more than Rs. 1 lakh as rent annually, you’ll be required to provide the PAN of your landlord along with the rent receipts.
Additional Reading: Fake Rent Receipts Could Get You In Trouble
How Is HRA Calculated
To figure out how much HRA exemption you are eligible for, consider these three values:
- The actual rent allowance the employer provides you as part of your salary
- The actual rent you pay for your house, from which 10% of your basic pay is deducted
- 50% of your basic salary when you reside in a metro or 40% if you reside in a non-metro
The least value of these three values is allowed as tax exemption on your HRA. You can discuss restructuring your pay structure with your employer in order to avail the most of your HRA tax benefit.
Here is a sample illustration for your understanding:
Sunitha earns a basic salary of Rs. 40,000 per month and rents an apartment in Delhi for Rs. 20,000 per month (hence eligible for a 50% of the basic pay for HRA exemption). The actual HRA she receives is Rs. 25,000.
These values are considered to find out her HRA tax exemption:
- Actual HRA received, i.e. Rs. 25,000
- 50% of the basic salary, i.e. Rs. 20,000, and
- Excess of rent paid over 10% of salary, i.e. Rs. 20,000 – Rs. 4,000 =Rs. 16,000
The value considered for her actual HRA exemption will be the least of the above values. Hence, the net taxable HRA for Sunitha will be Rs. 25,000 – 16,000 (available HRA deduction) =Rs. 9,000.
Additional Reading: Should I Buy A House Or Continue Staying On Rent?
We hope that we’ve addressed all your concerns about HRA. Looking to buy a home for yourself? You may want to explore these Home Loan offers.