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What Is HRA and How Is it Calculated?
When salary is disbursed, the finance or accounts department of your company provides you with a salary slip. This slip explains the various components that collectively make up your salary. One of the components is HRA or House Rent Allowance. Individuals can claim a house rent allowance exemption. But to do so, you need to first understand what is HRA along with the rules and exemptions pertaining to it.
What Is HRA and How Is it Calculated?
Put simply, a house rent allowance or HRA is usually a part of the salary that an employer pays to their employees, to pay for the rent of their accommodation. It can also be defined as the amount provided by the employer to help the employee afford the city’s cost of living.
A lesser-known fact about this allowance is that you need not be a ‘conventionally salaried’ employee to declare a portion of your salary or income as HRA. In fact, this allowance can also be declared by self-employed individuals or those working in companies that do not provide HRA. You can also claim a tax deduction on a certain quota of your house rent allowance, in accordance with Section 10 (13A) of the Income Tax Act, 1961.
Although self-employed individuals cannot claim HRA exemption under Section 10 (13A), they can claim similar benefits through Section 80GG of the Income Tax act.
How Is HRA Taxed?
As mentioned above, you can claim an HRA deduction on a part of your house rent allowance. However, how much HRA can be claimed, and how is house rent allowance calculated?
To better understand how HRA is calculated and taxed, consider the folllowing example of an individual who rents accommodation in a Metro City:
- Basic Salary is Rs. 50,000 per month (or Basic Salary + Dearness allowance if applicable)
- Actual HRA received from the employer is Rs. 25,000 per month (at 50% of basic salary, since living in a Metro City)
- Actual rent paid is Rs. 20,000 per month
To calculate the exact amount taxed under HRA:
Actual rent paid in excess of 10% of (Basic Salary + Dearness allowance if applicable), which is tax-exempt = Rs. 20,000 – (Rs. 50,000*10/100) = Rs. 20,000 – Rs. 5,000 = Rs. 15,000
Hence, HRA amount which will be charged to tax = Actual HRA received – Amount of exempted HRA = Rs. 25,000 – Rs. 15,000 = Rs. 10,000
The above is a very rudimentary example. The other points to note will be if the individual stays in a metro or a non-metro city and if they receive a dearness allowance as well. For those living in Metro cities, 50% of their basic salary + dearness allowance attracts tax exemption using the above calculation. For those residing in other cities other than metro, it is set at 40% for the exemption to be applicable.
Although the calculation may look straightforward, it is better to calculate your HRA taxable amount for a year. This would make things simpler while filing your income tax return (ITR).
Additionally, there are some basic rules to follow while determining the taxable amount. For instance, if the amount of rent paid by you yearly exceeds Rs.1,00,000, it is mandatory to provide the PAN number of your landlord while filing an ITR.
Besides paying rent to a landlord, you can also claim an HRA rebate in income tax if you are paying the amount to your parents, relatives, etc. The only clause is to provide relevant rent receipts to claim tax exemption.
Things to Keep in Mind About HRA Deductions
In addition to the basic rules mentioned above, you must also keep certain things in mind before trying to claim HRA benefits. Following are some important points to know -
- In case you are paying rent to your spouse, you cannot claim tax benefits under HRA. This benefit is only valid if rent is paid to your parents, relatives, etc
- Even if you have availed of a home loan, you can still claim HRA benefits. In fact, subject to conditions under the Income Tax Act, 1961, you can claim a house rent allowance as well as interest on a home loan.
- It is mandatory to provide your landlord’s PAN Card details if your house rent per annum exceeds Rs. 1 lakh.
- If your landlord is a non-resident Indian (NRI), you need to deduct a Tax Deducted At Source (TDS) of 30% before paying the rent.
- In case you are living in your own home, the house rent allowance paid by your employer will not be exempted from income tax.
- Employees without a specific HRA component cannot claim HRA exemption in income tax under Section 10 (13A) but can claim other benefits through Section 80GG of the income tax act.
HRA and City Compensatory Allowance
To avail of this house rent allowance deduction, it is important to understand the process that companies use to calculate your HRA. Factors such as salary structure, city of residence, compensation amount, etc are taken into consideration.
In general, house rent allowance is calculated using the following two rules -
- In case you live in a metropolitan city like Mumbai or Bengaluru, your HRA will be equivalent to 50% of your basic pay plus a dearness allowance if applicable. In any other city other than metro, the allowance will be 40% of your basic salary plus a dearness allowance if applicable.
- In case you do not receive any dearness allowance (DA) or commission, the HRA will be equal to 40-50% of your basic pay.
Along with HRA, some employers tend to pay a specific amount as city compensatory allowance (CCA). This is to cover the high cost of living and accommodation costs in tier-1 cities. People living in some tier-2 cities may also be eligible for a compensatory allowance.
Another key difference between HRA and CCA lies in their tax exemption. While tax benefits are available on your house rent allowance, the CCA amount is entirely taxable. It does not offer any tax exemption under the Income Tax act.
The actual amount that you can claim for deduction under the house rent allowance will be the lowest of the three categories mentioned below -
- The actual HRA amount that you receive from your employer
- The exact actual rent paid minus 10% of your total salary (basic pay plus Dearness allowance)
- 50% of your basic pay if living in a metro city and 40% if living in a non-metro city
How to claim HRA when living with Parents
In case you are living with your parents and also receive HRA, you can still claim tax exemption under the income tax act. One of the ways to achieve this is by entering into a rental agreement with your parents and paying a certain amount of money monthly.
By submitting a copy of the agreement along with monthly payment rent receipts, you can claim tax exemption under the IT Act. However, to make a rock-solid case, your parents will have to show the rent while filing their ITRs.
Another suggestion to save HRA can be used if your parents fall under the ‘low income’ category and hence, their income is not taxable. You can sign a rental agreement and pay a consistent sum to them monthly. By doing this, not only will you save HRA, but your parents may not be required to pay income tax.
HRA FAQ's
Is HRA paid monthly?
House rent allowance forms a component of your salary and so, is commonly paid every month. Since it is a tax-saving avenue, you can claim a monthly benefit by submitting rental receipts to your HR department. However, if it becomes too tedious, these receipts can be submitted on a quarterly, half-yearly, or yearly basis, as decided by the employer.
Is HRA mandatory in salary?
No, HRA is not a mandatory component of a salary structure. Whether or not to provide HRA depends on the company’s policy.
Can I claim HRA if I own a house?
To claim HRA, the person needs to fulfill three eligibility criteria -
1. Be a salaried employee
2. Have the HRA component in the salary structure
3. Should be living in rented accommodation.
If you live in your own home, you may not be able to claim HRA, unless you are living in a separate city for work.
However, you can enter into a rental agreement with your parents and pay a certain sum on a monthly basis to claim an exemption. All you need to do is submit the agreement and rent receipts while filing your ITR.
How can I maximise my HRA benefits?
The maximum HRA exemption benefits that you can avail of is the least of the following values -
a. The actual HRA amount that you receive from your employer
b. The exact actual rent paid minus 10% of your total salary
c. 50% of your basic pay plus dearness allowance if applicable when living in a metro city and 40% when living in a non-metro city
What happens if I don't claim HRA?
To claim HRA benefits, you are expected to submit documents such as a PAN card, rent receipt, photocopy of the rental agreement, etc. If you choose not to do so, the HRA section in your Form 16 will be considered taxable.
Who is not eligible for HRA?
To claim HRA, you need to be salaried, have an HRA component in your salary slip, and live in rented accommodation. Failure to fulfill any of these conditions will render you ineligible for HRA benefits. Moreover, if you decide to pay a fixed monthly amount to your spouse as rent, you cannot claim HRA deductions.
Which is better HRA or a home loan?
Both HRA and availing of a home loan have their own tax benefits. If you are living on rent and your employer pays your HRA, you can claim tax benefits on your HRA within the exemption limit. If you have a home loan, you can still reap the benefits while filing your ITR-1 form. You can claim a deduction under Section 24(b) on home loan interest as well as a tax deduction on the principal repayment under Section 80C.
Can I pay rent to my wife and claim HRA?
The answer is ‘no’. According to the income tax act, you cannot claim HRA benefits by paying rent to your spouse.
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