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.
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.
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 the company – Rs. 13,000 per month
10% of basic salary (10% of annual basic salary) – Rs. 36,000

Download Automated House Rent Exemption Calculator U/s 10(13A)

 

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.