How To Calculate Hra Exemption On Income Tax

HRA exemptions are part of Section 10(13A) of the Income Tax Act. One can claim deductions under this section if the following eligibility criteria are met:

• You are a salaried individual
• You receive HRA as a salary component
• You live in a rented house
• You actually pay house rent, i.e., the rent receipts are issued in your name.

How is HRA calculated?

Basically, HRA is determined based on your total pay or salary. Another factor affecting HRA is the city the employee resides in. In case the person lives in a metro area, he/she has an HRA equal to 50 percent of the income. The compensation is 40% of the income for cities other than a metro.

Salary is taken as the sum of basic pay, dearness allowances and any other incentives or commissions. If an employee does not receive a commission or a dearness allowance, then the HRA will be around 40% - 50% of his/her basic salary.

Though you are given up to 50% of your salary as HRA, you cannot get a tax rebate on this entire amount. For the sake of income tax rebate calculation, the lowest of the following three provisions is considered:

• Actual rent paid minus 10% of the basic salary, or
• Actual HRA offered by the employer, or
• 50% of salary when residential house is situated in metros; Mumbai, Delhi, Chennai or Kolkata; 40% of salary when residential house is situated in other cities

Let us look at an example: 

Mr.A gets the following salary every month. He lives in Kolkata and pays a rent of Rs.10,000 every month.

The salary components are given in the below table:

As per the income tax rule, let us do some calculations first. 

• We will consider his Basic Salary for this calculation since he does not receive any Commission or Dearness Allowance. 
• Basic Salary per annum = 35,000 * 12 = Rs.4,20,000 
• 10% of Basic Salary = Rs. 42,000
• HRA paid by the company is 15,000 * 12 = Rs.1,80,000
• Actual rent paid = Rs. 10,000 * 12 = Rs.1,20,000
• Since he lives in a Metro city, 50% of basic salary = Rs. 2,10,000

Now, if we apply the HRA rule, we get: 

• Actual rent paid minus 10% of Basic Salary = 1,20,000 – 42,000 = Rs.78,000
• Actual HRA offered by the employer = Rs. 1,80,000
• 50% of Basic Salary, as he lives in a Metro city = Rs.2,10,000

As per the above calculations, the ‘Actual rent paid minus 10% of Basic Salary’ is the lowest amount of all three, at Rs. 78,000. Hence, this is the amount that will be considered for your Income Tax rebate.

Rules to be Followed while Claiming HRA Rebate

• Your total HRA cannot be more than 50% of your basic salary.
• As a salaried employee, you cannot claim the full amount of the rent that you pay. Your rebate would be conditional on the least of the choices listed below:
• Actual rent paid minus 10% of the basic salary, or
• Actual HRA offered by the employer, or
• 50% of salary when residential house is situated in metros; Mumbai, Delhi, Chennai or Kolkata; 40% of salary when residential house is situated in other cities

• You can take advantage of HRA's tax incentives along with the principal and interest on your home loan.
• You are eligible to pay rent to your parents and collect a receipt for the HRA claim in case you stay with your parents. Similar laws, however, do not allow you to pay your spouse the rent and claim a tax exemption.
• If your housing's annual rent crosses Rs.1 lakh, you’re supposed to submit the PAN card of your landlord. In the event that the landlord does not have a PAN card, he / she may give a self-declaration.
• Another significant provision is that in the case that your landlord is an NRI, you have to deduct 30 percent tax from the amount of rent that needs to be paid.

Documents Required while Claiming HRA Tax Rebate

Taxpayer declares the rent amount he will be paying throughout the year, in the tax declaration form of his company. TDS is deducted based on this declared amount. At the end of the financial year, he should produce the relevant proofs and documents to support his claim. The documents you have to submit are:

• Rent receipts, if you can produce for individual months, or the Annual Rental Agreement, detailing the rent clearly.
• PAN Card copy of the landlord if the annual rental amount exceeds Rs.1 lakh.
• In case the landlord does not have a PAN card, he can provide a self-declaration to that effect.

How to claim house rent allowance when HRA is not part of your salary component?

If you are self-employed or your Company does not have an HRA component in your salary, how do you claim deductions for the rent paid? You can do so under Section 80GG of the IT Act.

Deduction under Section 80GG is applicable to those workers who do not earn HRA as part of their salaries (for example, they work in very small companies or in the informal sector) or to self-employed individuals. This section's contribution cap is Rs. 60,000 per annum.

Deductions under Section 80GG cannot be claimed by a person who owns a house but stays in a rental house in the same city. For example, if you own a house in Hyderabad but choose to stay in the same city in a rented accommodation, you will not get the benefit under Section 80GG.

FAQs

End Note

HRA is part of the salary component in most companies. HRA gives huge tax benefits to the middle income group which pays a hefty amount of rents in cities. Taxpayers should be prudent and make use of this provision to get considerable tax relief.