HRA Calculation

Last Updated 27th May 2020

HRA Benefits

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  • HRA exemption is a benefit provided to employees paying rent to reduce the tax burden.
  • HRA tax benefit can be calculated using the HRA calculator or manually.
  • HRA exemption is minimum out of these: Actual amount received as the HRA, 50% and 40% of the basic salary if one lives in metro and non-metro city or actual rent paid less 10% of basic salary.
  • Dearness allowance and commission are included in basic salary for computation of HRA Exemption.
  • Submit rent receipt or rent agreement to the employer to claim tax benefit.

House Rent Allowance

HRA or House Rent Allowance is a part of the income under the head ‘Salary’ provided by the employer to the employee. HRA comes under Section 10 of the Income Tax Act, 1961, and the exemption can be claimed partially or fully. Its prime aim is to help employees with tax benefits towards the payment for accommodations every year.

HRA Calculation

The amount of HRA exemption is deducted from the total income before arriving at a taxable income. It helps an individual to reduce tax. But HRA received from the employer, is fully taxable if an employee is living in his own house or if he does not pay any rent.
An Individual can calculate HRA using the HRA Exemptions Calculator. He can also calculate HRA manually, provided he is well versed with the HRA calculation and rules associated.

How is the HRA exemption calculated?

House Rent Allowance should be lowest out of the three provisions:

  • The actual amount received as the HRA from the employer.
  • In case an individual is staying in a metro city, the HRA amount is 50% of the basic salary and 40% if he lives in a non-metro city.
  • Actual rent paid less 10% of basic salary.

HRA Calculation with Example

To understand the HRA calculations, let us consider a few examples:

Case 1: Mr. Rajiv is a salaried individual who resides in Mumbai (a metro city). He is living in a rented accommodation and pays a rent of Rs. 15,000.

Salary component of Rajiv includes:

Basis salary* Rs. 45,000
Dearness allowance Rs. 2,500
Commission Rs. 2,500
HRA Rs. 20,000
Conveyance Rs. 2,000
Total Rs. 72,000

Tax-exempt part of Mr. Rajiv’s HRA will be the lowest of the following, considering his annual salary:

1. Actual amount received as the HRA 20,000* 12 = 2,40,000
2. 50% of the basic salary* .50*50,000*12 = 3,00,000
3. Actual rent paid less 10% of basic salary 15,000*12 -( .10*50,000*12) = 1,20,000

So, the tax-exempt part of the Rajeev’s HRA will be lowest among the three that is Rs. 1,20,000 through Actual rent paid less 10% of basic salary.

Note:

  • Basic salary includes dearness allowance and commission.
  • Mr. Rajiv lives in a Mumbai, which is a metro city, so 50% of the basic salary is considered.

Case 2: Mr. Hemant is a salaried individual who resides in Chennai (a metro city). He is living in rented accommodation and pays a rent of Rs. 25,000.

Basis salary* Rs. 45,000
Dearness allowance Rs. 2,500
Commission Rs. 2,500
(HRA) Rs. 20,000
Conveyance Rs. 2,000
Total Rs. 72,000

Mr. Hemant’s tax-exempt part of HRA will be the lowest of the following, considering his annual salary:

1. Actual amount received as the HRA 20,000* 12 = 2,40,000
2. 50% of the basic salary if he lives in metro city .50*50,000*12 = 3,00,000
3. Actual rent paid less 10% of basic salary 30,000*12 -( .10*50,000*12) = 3,00,000

So, the tax-exempt part of Hemant’s HRA will be lowest among the three that is Rs. 2,40,000 through actual amount received as the HRA.

Note:

  • Basic salary includes dearness allowance and commission.
  • Mr. Hemant lives in a Chennai, which is a metro city, so 50% of the basic salary will be considered for calculation.

Case 3: Mr. Avinash is a salaried individual who resides in Orissa (a non-metro city). He is living in rented accommodation and pays a rent of Rs. 20,000.

Basis salary* Rs. 45,000
Dearness allowance Rs. 2,500
Commission Rs. 2,500
(HRA) Rs. 25,000
Conveyance Rs. 2,000
Total Rs. 77,000

Mr. Avinash’s tax-exempt part of HRA will be the lowest of the following, considering his annual salary:

1. Actual amount received as the HRA 25,000* 12 = 3,00,000
2. 40% of the basic salary* .40*50,000*12 = 2,40,000
3. Actual rent paid less 10% of basic salary 30,000*12 -( .10*50,000*12) = 3,00,000

So, the tax-exempt part of Avinash’s HRA will be lowest among the three that is Rs. 2,40,000 through 40% of the basic salary.

Note:

  • Basic salary includes dearness allowance and commission.
  • Mr. Avinash lives in Orissa, which is a non-metro city so, 40% of the basic salary will be used in the calculation.

Tax benefits of HRA

  • The tax benefit on HRA reduces the tax burden on people as they are not taxed for getting a roof on their heads in the place they work.
  • An individual can avail of the tax benefit on HRA even when they are availing home loans on a different home.
  • It takes into account the higher rent paid due to place of residence.

FAQs on HRA Calculation

Are maintenance charges also included in the calculation of HRA tax exemptions?

No, maintenance charges are not included in the calculation of HRA tax exemptions. HRA exemptions can only be claimed for rent paid.

How much of my HRA is exempt from tax?

The lowest of the following will be allowed as a deduction from ones taxable income-

  • 50% of the basic salary if you live in a metro city
  • 40% of the basic salary if you live in a non-metro city
  • Actual rent paid is less than 10 percent of the basic salary
  • The actual amount of HRA paid by the employer.
Is Dearness Allowance included when calculating HRA?

Yes, dearness allowance is treated as part of basic salary.

Can I claim HRA tax exemption and rebate on my home loan?

Yes, an individual can claim HRA tax exemptions and rebate on his home loan.

What are the documents required to claim tax exemptions?

An individual will have to submit the rent receipts and the rent agreement to avail of the benefit under the house rent allowance. If the rent paid by him exceeds Rs. 1,00,000 annually, then he will have to submit the PAN Card details of the landlord along with the rent receipts and rent agreement.

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