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A Better Understanding of House Rent Allowance (HRA)

HRA or House Rent Allowance is one of the most important element of employee’s salary and till certain limit, it is exempted from tax liabilities. However, the income tax liabilities depend on the allowance one have received and the amount one have paid. This page explains about all the essentials of HRA in brief to educate our valuable users.

Defining HRA

HRA or House Rent Allowance is a salary component given by the employer to its employee for their monthly rent of the accommodation and if put in general terms, for monthly rent.

House Rent Allowance or HRA can be availed only to the people who are renting a house. The rental agreement can be made between any two parties except for your spouse.

HRA is an important component of your salary as it provides the individuals to saves their income tax.

The way to calculate HRA

HRA depends on multiple factors and the tax exemption is calculated keeping the below parameters in mind:

  • Salary (includes Basic pay and Dearness allowance)
  • Rent Paid
  • HRA received from Employer
  • Place of Residence (Metro or Non-Metro)

Keeping the above parameters in mind, the least of the below three will be exempted u/s 10(13A).

  • HRA received by the employee from their Employer.
  • Actual Rent Paid minus 10% of the annual basic pay and DA.
  • 50% of Annual Basic pay and DA for the residents of Metro Cities*. For others, it’s 40% of the Basic salary.

(Metro Cities – Delhi, Mumbai, Chennai and Kolkata)

House Rent Allowance provided by the employer to his employee will be taxable under “Income from Salary” to an extent that is not exempted u/s 10(13A).

Further Explanation of HRA Calculation

For better understanding of the HRA calculation, consider Mr. ABC XYZ stays in Lucknow and pays a monthly Rent of Rs 9,000 to his landlord. Below is the payslip provided by his employer

Name – ABC XYZ PF Number – ABC/AB/0000000/000/0000000
Employee ID – 0000 Date of Joining –1st April 2016
Basic Salary 18,000
DA 2,000
HRA 8,000
Conveyance 1,000
Special Allowance 4,000
LTA 2,000
Medical Allowance 1,250
Total Earnings 36,250
Provident Fund (PF) 2,000
Professional Tax 200
Net Salary 34,050

Considering the above-given scenario, calculating HRA which is exempted from being taxable will be:

Salary is Rs. 20,000 per month, HRA provided by Employer to Employee = Rs 8,000 X 12 = Rs 96,000 and 10% of annual basic salary = Rs (20,000 X 12) X 10% = Rs 24,000

Now looking at the PaySlip of Mr. ABC XYZ, we’ll calculate three scenarios:

  1. Received as HRA from Employer = Rs. 8,000 X 12(months) = Rs 96,000
  2. Actual Rent Paid minus 10% of the annual basic salary = Rs (9,000 X 12) – 24000 = 84,000
  3. 40% of Basic Salary = Rs (20,000 X 12) X 40% = Rs. 96,000

The least amount of the above three calculations will be HRA amount that will be exempted from tax and that will Rs 84,000.

Further, to calculate the Amount of HRA which will be taxable:

Taxable Amount of HRA = HRA received - Exempted u/s 10(13A)

Hence, Taxable Amount of HRA= Rs 96,000 – Rs 84,000 = Rs. 12,000 will form part of your taxable salary.

Important Points to Keep in Mind

  • The Rent paid for the premises should be occupied by the assessee during the financial year for which the ITR is filed.
  • If the Rent paid by the assessee exceeds more than Rs 1 Lakh during the financial year, a PAN CARD of the property owner or landlord is mandatory and is required to be furnished in the form.
  • If the rent paid is more than Rs 3000 per month, an assessee will be required to provide the rent receipts. Though, the rent receipts are not required if the rent paid is up to Rs. 3000 per month.
  • The rent receipts provided by assessee should include details like Property address, rent paid, Landlord Name, period of stay etc and should be affixed with one rupee revenue stamp along with the signature of the person receiving the rent.
  • HRA should not be claimed if you are living in your own house or if there are no expenditure incurred on the payment of rent.

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