HRA or House Rent Allowance is an allowance paid by an employer to its employees for renting a residential accommodation. HRA is a taxable income under the Income Tax Act, 1961. However, employees can claim HRA exemption while calculating their income tax. The amount of HRA exemption depends on various factors like the amount of rent paid, the city in which the employee resides, and the salary structure. In this article, we will discuss how HRA is calculated for income tax purposes.
Calculation of HRA exemption
To calculate the HRA exemption, the following steps need to be followed:
Step 1: Determine the actual rent paid by the employee during the financial year
The actual rent paid by the employee is the amount paid as rent for the residential accommodation taken on rent during the financial year. The rent paid should be supported by rent receipts.
Step 2: Calculate the least of the following three amounts:
a) Actual HRA received from the employer
b) 40% of the employee’s basic wage in a non-metropolitan area or 50% of the employee’s basic income if the employee lives there.
c) The excess of actual rent paid over 10% of basic salary
Let’s take the case of an employee who receives a base wage of Rs.
. 40,000 per month and receives an HRA of Rs. 20,000 per month. The employee pays a rent of Rs. 15,000 per month. The city of residence is a metro city. The calculation of HRA exemption will be as follows:
Amount of actual HRA paid by the employer: Rs. 20,000 per month
b) 50% of basic salary = Rs. 20,000 per month
c) Rent paid minus 10% of basic salary = Rs. 15,000 – (10% of Rs. 40,000) = Rs. 11,000 per month
The lowest of the aforementioned three sums is Rs. 11,000 per month. Therefore, the HRA exemption for the financial year will be Rs. 1,32,000 (Rs. 11,000 x 12 months).
Step 3: Calculate taxable HRA
The taxable HRA is the difference between the actual HRA received and the HRA exemption calculated in step 2.
In the above example, the actual HRA received was Rs. 20,000 per month, and the HRA exemption was Rs. 11,000 per month. Therefore, the taxable HRA for the financial year will be Rs. 1,08,000 (Rs. 20,000 – Rs. 11,000 x 12 months).
The following points should also be kept in mind while calculating HRA for income tax purposes:
The HRA exemption is only applicable if the employee is paying rent for a residential accommodation.
If the employee owns the house but is living in a different city, he/she can claim HRA exemption.
The HRA exemption cannot exceed the actual HRA received from the employer.
If the employee is not receiving HRA from the employer, he/she cannot claim HRA exemption.
If the rent paid is more than Rs. 1,00,000 per annum, the PAN of the landlord needs to be furnished.
The HRA exemption needs to be claimed while filing the income tax return.
HRA exemption is a useful tool for employees to reduce their income tax liability. However, it is important to ensure that the HRA exemption is calculated correctly and supported by proper documentation like rent receipts. If you have any doubts regarding the calculation of HRA exemption, you should consult a tax expert .