Introduction
HRA (House Rent Allowance) is a component of an employee’s salary, which is paid by the employer to the employee to cover their rent expenses. The HRA component is eligible for tax deductions under Section 10(13A) of the Income Tax Act, 1961. In this blog, we will discuss the calculation of HRA deduction under income tax.
HRA Calculation
The HRA component is calculated as a percentage of the employee’s basic salary. The percentage of HRA can vary depending on the city in which the employee is living. The percentage is higher for employees living in metropolitan cities like Mumbai, Delhi, Kolkata, and Chennai, as the rent expenses are usually higher in these cities.
The HRA component is calculated as follows:
Actual HRA received from the employer
- The employee’s rent for the rental home was paid
- 10% of basic salary (This is to account for the cost of maintaining the rented house)
The amount arrived at after the above calculation is the HRA deduction that the employee is eligible for under the Income Tax Act.
HRA Deduction Calculation under Income Tax
To calculate the HRA deduction under the Income Tax Act, the employee needs to follow the following steps:
Step 1: Calculate the actual HRA received from the employer.
Step 2: Calculate the actual rent paid by the employee for the rented house.
Step 3: Calculate the total salary of the employee for the financial year, which includes basic salary, dearness allowance (DA), and any other allowances.
Step 4: Determine the HRA component of the salary by using the following formula:
Minimum of the following three options:
a) Actual HRA received from the employer
b) 50% of basic salary for employees living in metropolitan cities, or 40% for employees living in non-metropolitan cities
c) Actual rent paid by the employee minus 10% of the basic salary
Step 5: Subtract the HRA component calculated in Step 4 from the actual rent paid by the employee. The resulting amount is the HRA deduction that the employee is eligible for under the Income Tax Act.
Note: The HRA deduction cannot exceed the actual HRA received by the employee from the employer. Additionally, if the employee is not receiving any HRA from the employer, they are not eligible for the HRA deduction under the Income Tax Act.
Conclusion
The HRA component of an employee’s salary is eligible for tax deductions under the Income Tax Act. To calculate the HRA deduction, employees need to consider the actual HRA received from the employer, actual rent paid by the employee, and the HRA component of the salary. By following the calculation steps mentioned above, employees can determine their HRA deduction and claim it while filing their income tax returns. It is advisable for employees to keep accurate records of their rent payments and HRA received from their employer to ensure that they receive the maximum tax deductions available to them.
