A Step-by-Step Guide on How to Calculate HRA in Salary

If you’re an employee, you may have heard of HRA, also known as house rent allowance, which plays a crucial role in your salary structure and can provide tax benefits. HRA serves as a component of your earnings that helps lower your tax liability, but it applies only if you reside in rented accommodation. To ensure you make the most of this allowance, it’s essential to understand how HRA is calculated for income tax purposes. In this blog, we will delve into the process of how to calculate HRA in salary for income tax, considering various factors and utilizing the HRA calculation formula. By the end, you will have a comprehensive understanding of how to calculate HRA in salary and leverage its advantages effectively.

How to Calculate HRA in Salary?

When it comes to determining the portion of House Rent Allowance (HRA) that can be excluded from the taxable salary, the following HRA calculation formula is used:

To calculate the HRA exemption, the least of the following values is considered:

1. Actual HRA received by the employee.
2. 50% of the basic salary, if the employee resides in a metropolitan city.
3. 40% of the basic salary, if the employee resides in a non-metropolitan city.
4. Actual rent paid by the employee minus 10% of the basic salary.

HRA Calculation Formula :

Actual rent paid – 10% of basic salary = HRA Tax Exemption Amount

By applying the formula mentioned above, the smallest amount among these options is considered exempt from the taxable salary. It’s important to note that individual circumstances may vary, and tax regulations can change over time. Therefore, it is advisable to consult with a tax professional or refer to the latest tax guidelines to ensure accurate calculations tailored to your specific situation.

HRA Calculation Example

Let’s take a look at the case of Mr. Aditya, an individual living in Mumbai who is employed and receives a monthly salary. He resides in rented accommodation and pays a monthly rent of Rs.10,000, which sums up to Rs.1.2 lakh annually. Below is a table presenting the various components of his monthly earnings:

For HRA deduction calculation, let’s look at Mr. Aditya’s House Rent Allowance (HRA). We need to consider various factors based on his annual earnings:

1. Actual HRA component of his salary: Rs.13,000 * 12 = Rs.1.56 lakh.
2. 50% of his basic salary, as he resides in Delhi: 50% * Rs.30,000 * 12 = Rs.1.80 lakh.
3. Actual rent paid minus 10% of basic salary: (Rs.10,000 * 12) – (10% * Rs.30,000 * 12) = Rs.84,000.

Among these options, the lowest value is Rs.84,000. Therefore, Mr. Aditya can claim a tax exemption of Rs.84,000 on his HRA. Any amount received as HRA beyond this exemption will be subject to taxation based on his income tax slab.

By availing this tax exemption, Mr. Aditya can effectively reduce his taxable income and potentially lower his tax liability. It’s essential for individuals to understand the tax rules and exemptions related to their salary components to make informed financial decisions.

HRA Calculator

Different Ways to Calculate HRA for Various Situations

1. Rent Payments to Family Members

Did you know that even if you pay rent to your family members, you can still qualify for a deduction under the House Rent Allowance (HRA)? It’s true! Even if you live with your parents, as long as you can provide proof of rental transactions, such as financial transaction records, a rental agreement, and rent receipts, you can be eligible for the HRA exemption. However, keep in mind that if you own the property or if your spouse owns it, you won’t be able to take advantage of this benefit. The property must be owned by someone other than yourself or your spouse to qualify for the HRA exemption.

2. Home Ownership in a Different City

Owning a house in a different city from where you live and work doesn’t mean you can’t claim the HRA. In fact, you can still submit an HRA claim and even deduct the cost of your home loan EMIs from your taxes. This falls under the HRA exemption rule stated in Section 10(13A) of the Income-tax Act. All you need to do is provide sufficient evidence to support your claim. So, whether your home is in a different city or not, you can still enjoy the benefits of the HRA exemption.

3. Rent Sharing with Your Spouse

When you and your spouse divide the expenses of renting a home, there’s a way to maximize the HRA deduction. Only one of you can claim the entire amount as an HRA deduction, so it’s important to decide who will make the claim. However, if both of you can obtain individual rent invoices for the rental payments, each of you can claim the HRA exemption individually. Just make sure there are no duplicate claims to comply with tax regulations. By effectively managing your rent-sharing arrangement and obtaining individual rent invoices, both you and your spouse can benefit from the HRA exemption.

4. No HRA from Employers

While employers are typically responsible for providing the HRA benefit, there are situations where they may not include it in your salary structure. But don’t worry, you can still claim the HRA even if your employer doesn’t pay it. Under Section 80GG of the Income Tax Act, you have the option to claim the benefit if you are paying rent, despite your employer not providing HRA. To complete the process, you will need to submit Form 10BA. So, even if your employer doesn’t pay HRA, you can still enjoy the benefits by meeting the requirements outlined in the Income Tax Act.

Eligibility to Claim HRA Tax Deduction

Rent Receipt Requirement

To claim a portion of your House Rent Allowance (HRA) as a tax deduction under Section 10(13A) of the Income Tax Act, it is important to ensure that your name is mentioned on the rent receipt. This serves as proof that you are the one making rental payments for the house you reside in.

HRA Component on Pay Slip

Another essential requirement is that your payslip should clearly show the House Rent Allowance (HRA) as a distinct component. This allows the income tax authorities to identify the specific portion of your salary designated for house rent.

Salaried Employee Status

To qualify for claiming HRA as a tax deduction, you must be a salaried or paid employee. Self-employed individuals or those earning income through other means may not be eligible for this particular tax benefit.

Residing in a Rented Home

Lastly, you must be living in a rented home to be eligible for an HRA tax deduction. If you are a homeowner or residing in a house for which you do not pay rent, you cannot claim HRA as a tax deduction under Section 10(13A) of the Income Tax Act.

Remember, meeting all these requirements is crucial to avail of the tax benefits associated with HRA. By fulfilling these conditions, you can reduce your taxable income and potentially lower your overall tax liability.

HRA in New Tax Regime

Unlike Old Tax Regime, you can’t claim HRA under the New Tax Regime of 2023. More details here

What Documents Are Required for HRA Exemption?

To claim tax exemption on House Rent Allowance (HRA), there are specific documents that you need to submit. Here’s a breakdown of the required paperwork:

Proof of Rent Payment: The primary document you must provide is the rent receipts or rental agreement. If you don’t have rent receipts, bank statements showing the rent transactions can be used as an alternative. It’s important to note that even if you are paying rent to your parents, you can still be eligible for this exemption as a taxpayer.

Bank Statements: In case you don’t have rent receipts, you will need to furnish bank statements along with your rental agreement. These statements serve as evidence of rent payment.

PAN Card of Your Landlord: As a taxpayer, you are required to submit your rent receipts for HRA tax exemption. If the annual rent of your housing unit exceeds Rs.1 lakh, you must also provide the PAN Card details of your landlord or landlady.

Self-declaration Form: If your landlord or landlady doesn’t have a PAN card, they can provide a self-declaration stating the same. This declaration should be submitted along with the other documents.

Important Points to Remember for Claiming HRA Deduction

• Landlord’s PAN: To claim HRA exemption, if your annual rent exceeds Rs 1 Lakh, you’ll need the landlord’s PAN. If the landlord doesn’t have a PAN, a signed declaration should suffice. Failing to provide either may result in the loss of tax deduction.
• HRA Calculation: The House Rent Allowance (HRA) varies depending on the city you reside in. In metro cities, you can claim up to 50% of HRA as a tax deduction. For non-metro cities, the allowable deduction is up to 40% of HRA.
• Renting vs Owning: HRA is designed to assist with the expenses of rented accommodation. Therefore, if you live in a house that you own, you cannot claim HRA as a tax deduction.
• Staying with Parents: If you reside with your parents and obtain a rent receipt in their name, you can claim an HRA exemption. However, your parents must include the rent amount in their income when filing their tax returns.
• Spousal Payments: It is important to note that paying rent to your spouse does not qualify for an HRA deduction. HRA benefits can only be claimed for rent paid to landlords who are not your spouse.

FAQs

How does HRA become tax-exempt?

Subject to certain conditions, a fixed portion of HRA is exempt from taxes according to the Income Tax Act of 1961. This exemption is regulated by Section 10(13A) of the Income Tax Act.

Who is eligible for HRA exemption?

Any salaried individual can claim an exemption for HRA. However, it’s important to note that not all salaried individuals are eligible. Only those who pay rent for residential purposes can claim this benefit.

Can I save on taxes if I don’t receive HRA?

Certainly! Even if HRA is not included in your salary or if you are self-employed, you can still save on taxes if you live in a rented house. According to Section 80GG of the Income Tax Act, you can claim a tax deduction based on the lowest value among the following: 25% of your gross annual income, actual rent paid minus 10% of your total income, or Rs. 60,000 annually or Rs. 5,000 per month.

Can a self-employed taxpayer claim HRA?

No, a self-employed individual cannot claim HRA exemption under the Income Tax Act of 1961.

Is it necessary to provide HRA to employees?

Yes, ideally, HRA should be included in the salary structure of employees.

Can we claim both HRA and home loan?

Yes, it is possible to claim both HRA and home loan benefits at the same time. For instance, if you live in a rented house in one city while owning a house (for which you are repaying a home loan) in another city.

Is a rent receipt mandatory for HRA exemption?

If the House Rent Allowance (HRA) you receive is within the limit of Rs. 3,000 per month, you can claim the HRA exemption without the need for providing rent receipts. However, if your HRA exceeds Rs. 3,000, it becomes necessary to provide rent receipts in order to claim the HRA exemption.

How is HRA rebate calculated?

a. HRA received from the organization
b. Actual rent paid – 10% of basic salary = HRA Tax Exemption Amount.

HRA rebate is considered the lowest between a. or b.

Which are the metro cities considered for HRA calculation?

Here are the four metropolitan cities considered for HRA calculation –
1. Delhi
2. Mumbai
3. Kolkata
4. Chennai