HRA Calculation – How to Calculate HRA Tax Exemption: There is a very common term called HRA, which stands for House rent allowance. In relation to rented residential accommodation occupied by the employee, the employee receives the House Rent Allowance from the employer. In general, an HRA is actually the amount that an employer pays to an employee, in order to cover the expenses of their accommodation. Salary and place of residence determine the allowance. Depending on the circumstances, HRAs may be fully or partially tax-exempt. The salaried employees can claim this exemption and lower their taxes if they live in a rented house.
Here in this article, we will talk about the HRA calculation and how the tax can be fully or partially exempted depending on the situation.
What is House Rent Allowance (HRA)?
It is important to note that the House Rent Allowance (HRA) is a component of income under the head Salary. It is a form of compensation that is provided to the employee by the employer in the event that they can get rented accommodation.
HRA Tax Exemption Rule
A minimum of the following qualifies for HRA deduction:
- HRA actually received
- For residents of metro cities, 50% of salary, or 40% for non-metro residents; and
- Actual rent paid should be less than 10% of basic salary + DA
A person/employee is only entitled to the tax benefit if they live in rented accommodation and if they occupy the rented residence during the period of time when it is rented.
You will not be able to claim the house rent allowance as a tax deduction if you choose the new tax regime from FY 2020-21 (AY 2021-22).
Conditions to Claim HRA Exemption
Rented Accommodation: You should have stayed in rented accommodation.
Rent Payment: You should pay rent to the owner regularly.
Ownership: The accommodation or premises are not owned by you or any of your family members.
Proof of Rent: You should produce all the rent receipts as proof of actual payment.
Rent Receipt: If you are getting HRA up to Rs.3000 p.m. then you are not required to produce the rent receipt.
Rent Over Rs. 1 Lakh: In the case of a tenant paying more than Rs 1 lakh in a year as a rent, the tenant will be required to provide their landlord’s PAN to be able to take advantage of HRA exemptions. HRA exemptions may be lost if you fail to do so.
Rent Paid to NRI: It is the tenant’s responsibility to deduct 30% TDS before paying rent to NRI landlords.
HRA for Self-Employed Individuals: HRA exemptions are only available to salaried employees with HRA components in their salary packages. HRA exemptions are not available to self-employed individuals. However, self-employed individuals can claim the deduction under section 80GG.
Salary Including for Calculation HRA: The salary includes dearness allowance if the terms of employment so provide (e.g. where it is taken into account while calculating P.F. & allowance etc.) but exclude all other allowances and perquisites.
Rent paid to your parents: You can claim the HRA tax exemption if you live with your parents and pay rent to them. In order to avoid rejection of your claim by the tax department, it is advisable that you have documented proof of your claim, such as rent receipts, financial transactions, and rental agreements.
Own a house but live elsewhere: When you occupy a rented property but own a house, you can still claim HRA benefits if you are working in another city. The HRA exemption cannot be claimed by a person who receives HRA but lives in his own apartment. The whole HRA amount received will be taxable in your hands.
How to Claim HRA Benefit
- You must provide your employer with a rent agreement and/or rent receipts in order to avoid excessive TDS deductions.
- The benefit is still available to you even if you forget to submit rent receipts/rent agreements to your employer.
- HRA benefits can be claimed when you file your income tax return, and any excess TDS can be claimed as well.
- Rent receipts and proofs of rent paid should be kept since the tax department may ask for them to authenticate your claim.
Examples to Clear the Concept of HRA Calculation
Mr. Tarun has rent-paid accommodation in Delhi. The following numbers will help Tarun to calculate the exemption of HRA.
Pariculars Amount (P.A.)
Basic Salary 500000
HRA 90000
Rent Paid 80000
Now find the least of the following for exemption
Actual HRA 90000
Rent Paid - 10 % of Salary i.e [Rs.80,000 - Rs.50,000] 30000
50% of Salary (As in Delhi) 250000
So, HRA exemption is Rs.30,000 and taxable amount is (Rs. 90,000(HRA) - Rs.30,000(Least of above)) = Rs.60,000
It is helpful for any tax consultant.