What Is HRA & How To Calculate HRA Exemption
Working and earning is exhilarating as you can spend money any way you want. Most newbies love the sense of independence brought by their first salary. However, slowly and steadily, they realize there is so much paperwork involved; and not to forget taxes! Hence, many people are looking to find ways to reduce the income tax paid by them. HRA or House Rent Allowance is one such way that people can save on some amount of tax.
House Rent Allowance (HRA)
HRA is an amount paid by the employer to the employees, as part of their salary, which pays towards their accommodation every year. The HRA is applicable for those employees who live in rented accommodations only. HRA provides employees with tax benefits as regulated under Section 10(13A) of the Income Tax Act. The tax exemption on HRA is applicable only for salaried individuals who pay rent. Self-employed individuals or those employees living in their own houses cannot claim HRA. Another essential detail regarding HRA is that if an individual is paying rent that exceeds Rs. 1 Lakh in a financial year, they need to provide PAN details of the landlord and the HRA claim.
Factors for HRA Calculation
HRA is an essential and integral part of an employee’s salary. It is helpful for any individual as it is calculated for tax benefits for a financial year. It helps reduce the taxable income, thereby reducing the amount of tax paid by an individual. HRA calculation depends on several factors, primarily being the salary of the employee. Another factor considered includes the employee’s city of residence (50% of salary is given as HRA in a metropolitan city; for other towns, HRA is 40% of salary). Any employee’s salary is the sum of basic salary, DA (dearness allowance), and other commissions. If an employee is not getting any DA or commissions, HRA is calculated as 50% or 40% of the basic salary. You can easily calculate here.
There are 3 provisions for HRA; the actual HRA offered (and thereby considered for tax deduction) will be the lowest of the options available:
- The substantial amount received from the employer as HRA
- Actual rent paid (less than 10% of basic salary)
- 50% of basic salary (if residing in a metro city) or 40% of basic salary in the case of non-metro cities.
Rules for HRA Claim
For claiming HRA, here is a list of rules:
- HRA cannot exceed more than 50% of the basic salary
- You pay the total rental amount that cannot be claimed. Exemption criteria are mentioned earlier.
- You can take dual tax benefits by claiming HRA along with a home loan.
- If you are staying with your parents, you can claim HRA by paying rent to your parents and submitting the HRA claim receipt. (Not applicable in case you pay rent to your spouse)
- PAN card of landlord mandatory if rent exceeds Rs. 1 Lakh per year. In case the PAN card of the landlord is not made, they can provide a self-declaration.
- If your landlord is an NRI, you need to deduct 30% tax from the rent amount, which must be declared.
Any salaried individual can claim HRA for the expenses made due to rented accommodation. This can bring down their taxes as HRA can be partially or fully exempted from tax. If you get HRA and don’t live in rented accommodation, the allowance is entirely taxable.