How to Calculate HRA from Basic Salary
House Rent Allowance (HRA) is a significant taxable element of a pay slip. It is the amount that a company provides to their employees to help with living expenses when they are renting a property.
The HRA varies depending on the city. Additionally, it varies based on the city's cost of living. According to section 10, the amount received as a portion of the House Rent Allowance (HRA) may be subtracted from the taxable salary (13A).
What is HRA Tax Exemption?
According to the Income Tax Act of 1961, a portion of an employee's HRA is exempt from taxation, and the remainder is taxable.
To determine the amount of HRA that may be deducted from the total salary, a set of criteria must be met. Determining the deductions is part of the HRA income tax calculation.
You cannot use HRA if you reside in a home that you own because it is intended to cover the cost of your rented housing.
How is Exemption on HRA is Calculated?
HRA is mainly determined by your salary. As per the income tax rules, the tax-exempt is part of the HRA (House Rent Allowance). The factors listed below determine how the HRA is calculated:
- Rent paid: The actual rent you paid for living in the residence. You can’t claim HRA if you stay in a hotel. You will need rent receipts, bank statements and lease agreements to prove that you are paying rent.
- Salary: The different salary components such as basic salary, your Dearness allowance (DA), and special allowances play a role in determining your HRA.
- Residence: The city you live in can affect your HRA. If you live in a metropolitan city then the HRA should not exceed 50% of your basic salary and 40% of your basic salary if you reside in a non-metropolitan city.
- HRA from the Employer: The actual HRA you receive from your employer is an important factor in calculating HRA deductions.
HRA Calculation with Example
Let us consider the scenario of a salaried individual, Mr. Ganesh, who resides in Delhi. He lives in rented accommodation and pays a monthly rent of Rs.10,000. This amounts to Rs.1.2 lakh annually. The table below shows his monthly earnings:
Components | Amount |
Rs.30,000 | |
HRA | Rs.13,000 |
Rs.2,000 | |
Rs.3,000 | |
Leave Travel Allowance (LTA) | Rs.5,000 |
Total Earnings | Rs.53,000 |
In Mr. Ganesh's example, the tax-exempt part of his HRA would be the lowest of the following, considering his earnings on an annual basis:
- Actual HRA component of salary: (Rs.13,000 * 12) = Rs.1.56 lakh
- 50% of his basic salary, as he stays in Delhi: (50% * Rs.30,000 * 12) = Rs.1.80 lakh
- Actual rent paid minus 10% of basic salary: (Rs.10,000 * 12) - (10% * Rs.30,000 * 12) = Rs.1.2 lakh – Rs.36,000 = Rs.84,000
Since Rs.84,000 is the lowest value above, this is the amount of tax-exemption Mr. Ganesh can receive on HRA. The rest of the HRA amount received will be taxed as per his income tax slab.
HRA in New Tax Regime
The new tax regime has witnessed a lot of changes when compared to the old regime. However, one of the biggest changes that are to be pointed out is the fact that the new regime will not have some of the exemptions or deductions from the last tax regime. These include the House Rent Allowance or HRA as well. Thus, if you opt for the new tax regime and file your taxes accordingly, you will not be able to enjoy the deduction for HRA.
Eligibility to Claim Tax Deduction on HRA
If the following requirements are satisfied, a portion of HRA may be claimed as a tax deduction under Section 10(13A) of the Income Tax Act:
- Your name should be on the rent receipt (indicating that you are paying the rent for the house).
- HRA should be a component of your pay slip.
- You should be a salaried/paid employee.
- You should reside in a rented home.
Required Documents to Claim HRA Tax Exemption
You will have to submit the following documents to claim HRA tax exemption:
- Rental receipts that reflect the rent required to calculate HRA deductions or the rental agreement that specifies the corresponding rent amount.
- A copy of the landlord's PAN card or a declaration form with their signature is also needed if the rent exceeds Rs.1 lakh per year. The same documentation will be required for parents' or family members' rent payments in order to calculate HRA tax.
Can I claim tax exemption on HRA and deduction on home loan interests at the same time?
Yes, this is possible. You may be living in a rented house in one city while you own a house (for which you are repaying a home loan) in another city.
- You can claim tax exemption on HRA for the rent paid.
- You can also claim tax deduction on the home loan interest paid.
- Tax deduction can be claimed on home loan principal repayment as well.
FAQs on HRA Calculation
- What is the formula for calculating HRA?
The employee's actual rent payment is 10% of their base pay, or employer's actual HRA offered, or 50% of the basic salary for a residential house in a metropolitan city and 40% of the salary if the employee resides in a non-metropolitan city.
- Is it necessary to submit my landlord’s PAN card to claim HRA deduction?
If you pay more than Rs 1 lakh in annual rent, the landlord's PAN is necessary to qualify for HRA exemption. In the absence of a PAN in the landlord's name, a signed statement should be submitted.
- Can I claim for HRA exemption if I am living with my parents?
Yes, you can claim HRA exemption if you are living with your parents and can provide a rent receipt in their name. However, when it comes time to filing their income tax returns, your parents must include the same rent as part of their income.
- Can I pay rent to my spouse and claim for HRA deduction on it?
No, you are not permitted to a deduction in HRA if you pay rent to your spouse.
- Can I save Tax if I don’t receive HRA?
Yes, if you continue to live in a rented home, you can save taxes even if your pay stub does not include HRA or if you work for yourself. Section 80GG of the Income Tax Act allows you to deduct the least of the following from your taxes: 25% of your gross annual income; actual rent paid (10% of total income); Rs. 60,000 per year; or Rs. 5,000 per month.
- Can I deduct HRA from my taxes even though I own a home?
Yes, in certain cases where you live in a rented house in a different city from the city you own a house in.
- I don’t have rent receipts. Can I still claim HRA deductions?
Yes, provided you have a rent/lease agreement and bank statements supporting your claim.
- How can I calculate HRA deductions?
The Income Tax Department’s HRA calculator is a good option to calculate the amount of claimable deduction u/s 10(13A) of the Income Tax Act.
- Can I still claim for HRA deduction if my house is currently being built, so I've rented another place in the same city?
Yes, you can claim for HRA deduction if you are paying rent and your own house is still under construction.
- I have forgotten to submit rent receipts to my employer. How can I claim HRA tax benefit now?
In this case, you can claim the tax benefit on HRA at the time of filing income tax returns. You will have to keep the proof of rent payment handy, as you may be required to submit these documents to the Income Tax department to authenticate your claim.
- Can anyone claim tax exemption on HRA?
No, not everyone can claim tax exemption on HRA. Although HRA is part of the salary of most employed individuals, the exemption can only be availed by those who pay rent. HRA exemption is also not applicable for self-employed individuals.
- Can I claim HRA tax exemption when paying rent to a family member?
You can claim tax exemption on HRA if you are paying rent to your parents. However, you should have sufficient documents that serve as proof of this transaction.
- HRA is not part of my salary, but I stay in a rented accommodation. Can I get any tax benefits?
If an individual pays rent for an unfurnished/furnished house, he/she can claim tax deduction on the rent paid (under Section 80 (GG) of the Income Tax Act), provided HRA is not part of his/her salary. He/she should furnish Form 10B for this purpose.
- Can the maintenance charges that I pay for my apartment be included for HRA tax exemption?
No, HRA exemption can be claimed only for the rent paid. You won't be able to claim a tax deduction for the maintenance or electricity charges. These charges are also not considered as the landlord's earnings when calculating his/her income tax.
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