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How To Calculate HRA For Saving Income Tax?

How To Calculate HRA For Saving Income Tax?

Perhaps, all of us are acquainted with the term “HRA”. But, do you know that HRA helps immensely in reducing your taxable income? And, it can be your best friend when it comes to income tax saving. House Rent Allowance (HRA) can be claimed by people who get HRA as a component in their salaries. It can be claimed by an individual taxpayer or HUF( Hindu undivided Families) under section 10(13A) and while people who do not get HRA cannot claim tax deductions under 10(13A), but if they have expenses regarding accommodation they can get the tax deduction under section 80GG of the Income Tax Act of 1961. 

Now, let’s walk through the road of House Rent Allowance.

HRA is given by an employer to its employees to meet their rental expenses. HRA can be claimed by submitting rent receipts or rent agreements and can help you in saving some precious money in your taxes. A flip side to it is if you get HRA in your salary but if you are not living in a rented place, then HRA component in your salary will be taxable.

So, what are the deciding components while it comes to HRA amount? 

The amount of HRA given to an employee basically depends on two factors.

1. What is your salary? 

House Rent Allowance depends on your basic salary – a part of your salary slip.  

Salary= Basic Pay + DA ( Dearness Allowance ) + Conveyance Allowance + other commissions received on the basis of sales turnover

2. Are you living in a metro city or a non-metro city? 

The city of your residence is equally important while calculating your HRA. 

For metro cities such as Mumbai, Delhi, Kolkata, and Bangalore, your HRA will be 50% of your salary and 40% for the non-metro cities.

Things you should know about claiming HRA 

  • If you are living in a rented space as an employee, then you are eligible to claim HRA.
  • HRA can be claimed if the rent is paid by you to your parents/brother/sister-in-law, etc. But, it can not be claimed if the house property is owned by your spouse.
  • If the husband and wife share the rent, then the amount to the extent paid by each can be claimed by both.
  • HRA can be claimed if you live in one city and you have rented out your own house in another city. But, you have to show income from your own house under income from house property.
  • PAN number of the landlord is compulsory when the rent amount is over 1 lacs per year or 8,333/ month. If the landlord does not have a PAN number, then he must give you a declaration statement.
  • In case your landlord is an NRI, you have to deduct 30% tax from the rent amount that requires to be declared. 

How To Calculate HRA for Saving Income Tax?

       Let’s imagine, Arjun is living in Kolkata and he is eligible to claim HRA. His tax exemption on HRA will be based on the least three options mentioned below,

  • Arjun’s actual HRA allotted by the employer. 
  • Actual rent that he pays – 10% of the basic salary ( basic pay+ DA+ other commission) 
  • 50% of basic salary as Arjun is living in Kolkata (40% if he stayed in a non-metro city)

So, now let’s check Arjun’s pay slip.

Basic Pay + DA = 15K ( No commission)

HRA= 5000

Conveyance= 2000

Actual HRA : 5000× 12 (months)= 60,000

50% of Basic salary= (15÷2)×12= 90,000 ( He lives in Kolkata)

Actual Rent – 10% of basic pay ( pay+ DA)  = 1lacs ( rent in a year) – 15×12×0.1 = 99,984 

So, the least amount is 60,000 and it will be counted for tax deduction under section 10(13A). 

Now, what if someone is self-employed or an employee who doesn’t have HRA as a component in their salary structure. So, are they eligible for a tax deduction? 

Yes, they are also eligible for income tax saving  but not under section 10(13A). They are eligible for tax exemption under 80GG. The maximum deduction permitted under this section is 60,000. 

The least of the following is available for tax deduction under section 80GG:

  • If the rent paid in  excess of 10% of total income
  • 25% of total income
  • From FY 2016-17 Rupees 5000 per month or Rupees 60,000 per year.

House Rent Allowance or HRA, is simply an added benefit offered by an employer to its employees. It is a blessing in disguise when you are living far away from home and paying various taxes. But, it is true that you can not claim full tax exemption on you HRA. The last date of claiming HRA tax exemption is usually 1st July of a given financial year for incomes that don’t require auditing and 30th September for incomes that require auditing.

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