• How to Calculate HRA from Basic Salary - HRA Calculation with Example

    What is HRA (House Rent Allowance)?

    HRA or the House Rent Allowance is an amount paid by employers to employees as a part of their salaries. It provides employees with tax benefits for what they pay towards accommodations every year. The decision of how much HRA needs to be paid to the employee is made by the employer based on certain criteria like the salary and the city of residence. The house rent allowance is regulated by the provisions of Section 10(13A) of the IT Act.

    Union Budget 2018

    House rent allowance benefits are only available to salaried individuals. Self-employed individuals are exempt from claiming HRA. This exemption is also available only if the employee is living in rented accommodations. In case the employee lives in his/her own house and does not pay any rent, he/she cannot claim HRA.

    HRA Calculation
    HRA CALCULATION

    In case the employee is living in a rented accommodation and the rent paid exceeds Rs.1 lakh in one financial year then the PAN details of the landlord need to be submitted along with the HRA claims.

    How is HRA Decided?

    HRA is actually decided based on the salary. There are some other factors that affect it which could include things like the city in which the employee resides. If the place of residence is a metro city then employees are entitled to an HRA equal to 50% of the salary. For all others cities the entitlement is 40% of the salary.

    For the purpose of calculating the HRA, the salary is defined as the sum of the basic salary , dearness allowances and any other commissions. If the employee is not receiving a dearness allowance or commissions then the HRA will be 50%/40% of the basic salary.

    The actual HRA offered will be the lowest of the following three provisions:

    • The amount received as the HRA from the employer.
    • Actual rent paid less 10% of the basic salary.
    • 50% of the basic salary if staying in a metro city and 40% in a non-metro city.

    House Rent Allowance (HRA) Calculation

    The House Rent Allowance (HRA) is an essential component of an individual's salary that defines the total amount allotted by the employer towards the employee's accommodation as rent. The HRA amount can be beneficial for an employee as it is calculated for tax deductions for a particular financial year. The HRA helps in reducing the taxable income that you are liable to pay. The HRA tax benefits are only applicable for those employees who stay in a rental accommodation. If an individual is staying in his/her own house, he/she won't be eligible to claim the amount for tax deductions. The calculation of HRA is based on various factors, such as the entitlement to 50% of the basic salary, if the employee is staying in a metro city (40% for other cities). The calculation of HRA for tax benefit is considered from one of the following three listed provisions:

    • The actual amount allotted by the employer as the HRA.
    • Actual rent paid less 10% of the basic salary.
    • 50% of the basic salary, if the employee is staying in a metro city (40% for a non-metro city).

    The least of the above mentioned amount will be considered for tax deduction from HRA.

    How to Calculate HRA

    To understand how to calculate HRA let us return to the example of Ravi Bajaj. He stays in Mumbai and pays a rent of Rs. 10,000 per month. His payslip is shown below.

    Example Payslip:

    Employee No - 1234 Name - Ravi Bajaj   
    Joining Date - 21/12/2012 PF No - SB/AYE/1234567/123/1234567   
          
    BASIC 30,000 PF 2,000
    HRA 13,000 Professional Tax 200
    CONVEYANCE 2,000    
    SPECIAL ALLOWANCE 3,000    
    MEDICAL 1,250    
    LTA 5,000    
    Total Earnings 54,250    

    For calculating Ravi’s HRA that is exempt from Income Tax we have:

    Salary - Rs. 30,000 per month (the basic salary will be considered in this case since there is no commission or dearness allowance)
    HRA provided by company – Rs. 13,000 per month
    10% of basic salary (10% of annual basic salary) – Rs. 36,000

    Calculate HRA from Basic

    Now we calculate the three scenarios:

    • Amount received as HRA from employer = Rs. 13,000 X 12(months) = Rs. 1,56,000
    • Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
    • 50% of basic salary since he lives in a metro = Rs. 1,80,000

    In the case of Ravi, it is evident that the HRA amount which will be exempt from tax will be Rs. 84,000 because that is the amount that is the least of the three scenarios.

    HRA claim rules

    The following rules are applicable for HRA claims:

    • The HRA cannot exceed more than 50% of your basic salary.
    • You cannot claim for the full rental amount you are paying. The exemption is based on the least of the following options:
    1. The actual amount allotted by the employer as the HRA.
    2. Actual rent paid less 10% of the basic salary.
    3. 50% of the basic salary, if the employee is staying in a metro city (40% for a non-metro city).
    • You can take advantage of tax benefits of HRA along with a home loan.
    • If you are staying with your parents, you can pay rent to your parents and collect a receipt for HRA claim. However, the rules don't allow you to pay rent to your spouse.
    • The landlord's PAN card is mandatory for rent exceeding Rs.1,00,000 per year. The landlord can provide a self-declaration in case if he/she doesn't have a PAN card.
    • If your landlord is an NRI, you must deduct 30% tax from the rent amount that needs to be declared.

    Benefits of HRA

    The biggest benefit of the house rent allowance is that it provides for an avenue to reduce the taxable income , which in turn leads to a reduction in the tax that you have to pay.

    FAQ

    Frequently asked questions about house rent allowance.

    1. Can anyone claim HRA?

      No, not everyone can claim HRA. House rent allowance is afforded to those who are living in rented accommodations. It is not applicable for self-employed individuals and those who live in their own houses.

    2. Can I claim HRA if I live in my own house?

      No. If you live in your own house you cannot claim HRA.

    3. Can I claim HRA and deduction on home loan interests?

      There may be a situation where you own a house but still choose to stay in a rented accommodation because it happens to be closer to your office or because your place of work is in another city. In such a situation you can claim house rent allowance and exemptions on the home loan interest at the same time.

    4. When do I have to provide the PAN information of my landlord?

      If the annual rent paid by you exceeds Rs. 100,000 in one financial year, the landlord’s PAN details need to be provided.

    5. Do I have to produce rent receipts while claiming HRA?

      If the rent paid every month is up to or less than Rs. 3,000 then rent receipts need not be provided. If the monthly rent does exceed Rs. 3,000 then rent receipts will be needed.

    6. I live in a house owned by my spouse and pay rent to my spouse. Can I claim HRA?

      Technically there is nothing illegal about paying rent to a spouse as long as they, the spouse, show it as an income and declares it. There must also be a record of this transactions because if the IT departments decides to take a closer look at your case and finds discrepancies, it might lead to trouble.

    7. . Is it possible to claim the HRA for two houses?

      No, the HRA benefits are available for only one house in the concerned city of the workplace.

    8. . What are the documents required for HRA exemption?

      In order to apply for HRA exemption, you will require producing the Rent Receipts. If your rent amount exceeds Rs.15,000 per month, then either the PAN card of the landlord or a written consent (stating the PAN is not available) from the landlord is required.

    9. . Is Dearness Allowance included in the HRA?

      The Dearness Allowance (DA) is the components that are associated with the retirement benefits. The HRA is a type of remuneration the employer offers to support your rental amount towards accommodation. Hence, the DA and HRA are two different components and not merged together.

    10. . Does HRA include maintenance charges?

      No, the HRA is paid towards rent only. You won't be able to claim the maintenance fee as HRA. The maintenance charges are not considered as the landlord's earnings to be calculated for his/her income tax.

    11. . Does HRA include electricity charges?

      No, you won't be able to claim the electricity charges as HRA. The electricity charges are not considered as the landlord's earning since it is paid to the electricity provider.

    12. . How to claim HRA without landlord's PAN card?

      If the annual rent exceeds Rs 1,00,000 per annum, it is mandatory for the employee to obtain the PAN card from the landlord. The PAN card will be required as a proof while submitting the HRA claim. If the landlord does not have a PAN, a declaration needs to be obtained that will include details such as landlord's name, address, the rent amount you are paying, and the period of accommodation.

    13. . Does HRA come under 80C?

      No, Section 10(13A) is for House Rent Allowance (HRA).

    14. . When is HRA is applicable?

      HRA is applicable for individual who stay in rented accommodation. It is a part of the salary that is given by the employer to support the employee's accommodation.

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