HRA Calculation – How to Calculate HRA Exemption?

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House Rent Allowance-HRA

Here’s is a comprehensive guide on House rent allowance. You will learn – How to Calculate HRA exemption with examples. HRA rules regarding its taxability and exemption as per the Income Tax Act.

What is House Rent Allowance (HRA)?

HRA (House Rent Allowance) is one of the components of the salary package as per terms &  conditions of employment.

HRA is generally given by an employer company to its employee to meet house rent expenses of a house taken on rent by the employee for his or her stay.

The Income Tax Act allows for deduction in respect of the HRA paid to employees.

So, the biggest advantage of HRA is the tax deductions allowed under section 10 (13A) of the Income Tax Act.

HRA Exemption Rules and Limit

But, here it is to be noted that the entire HRA amount which you received from your employer is not deductible. HRA is an allowance and is subject to income tax.  You can claim exemption as per section 10(13A) and Rule 2A.

You will be eligible for HRA exemption as long as you pay rent for your accommodation and receive HRA form his employer.

For exemption of HRA, occupied house must not be owned by you, the same should be taken on rent.  For example: If you stay in your own house then nothing would be deductible/ exempted, entire HRA would be taxable in that case.

Thus, HRA amount which you received from his /her employer is taxable under the head “Income from Salaries” to the extent not exempts under section 10(13A)

HRA Receivedxxxx
(-) Less: Exemption u/s 10(13A) (xxxx)
Taxable Amountxxxxx

   

How to Calculate HRA exemption?

Now, we will see how to calculate HRA exemption.  What factors need to be taken into consideration for HRA calculation?

HRA exemption based on following factors:

  1. Salary
  2. HRA received
  3. Actual Rent Paid
  4. City of Residence (Metro or Non metro)

HRA amount to be exempted under section 10(13A) will be least of the following:

  1. Actual HRA received by employee
  2. Actual House Rent Paid minus 10% of the Salary

  1. 50% of the Salary where house is situated at Metro (i.e., Delhi, Mumbai, Kolkata, Chennai) or 40% of the Salary where house is situated at any other place (i.e., non-metro)

Minimum of the above three amounts shall be exempt from tax and the balance shall be taxable under the head “Income from salaries” thus to be included in gross salary of employee.

Meaning of Salary for the purpose of Calculation of HRA exemption

Salary means – Basic + DA + Commission based on fixed percentage on turnover

Salary is to be taken on due basis in respect of the period during which the period accommodation is occupied by the employee in the previous year.

Example – HRA Calculation as per Section 10(13A) of the Income Tax Act

For better understanding, here I am taking a sample case or example of HRA calculation.

Case – A

Mr. Sumit Anand who is working with ABC Ltd and entitled to a basic salary of Rs. 40,000 per month and dearness allowance(DA) of Rs. 20,000 per month.

Apart from that he is also entitled to a house rent allowance (HRA) of Rs. 25000 per month. He is staying in a rented flat in Bhopal for which he is paying Rs.15000 per month as rent.

Solution: In the above illustration, first we will calculate Salary of Mr. Anand, then HRA exemption.

Basic Salary40,000 per month
DA20,000 per month
HRA received25,000 per month
Rent Paid15,000 per month
Residence CityBhopal (Non metro)

Salary for the Purpose of computation of HRA

Basic Salary (40,000 X 12)480,000
DA  (20,000 X 12)240,000
Total720,000

Now, Minimum (least) of the following amount will be exempt from Tax:

a.Actual HRA Received (25,000 X 12)300,000
b.Actual Rent Paid – 10 % of Salary [(15,000X12) –(10/100X 720,000)]108,000
c.40% of the Salary*288,000

*City of Residence is Indore i.e., non-metro that’s why 40% considered otherwise 50%

Thus, Rs. 108,000 will be exempted from tax as House Rent Allowance (HRA) and balance HRA (300,000 – 108,000) of Rs. 192,000 shall be included in gross salary of Mr. Anand and will be taxed.

Case-B(Change in Salary)

Mr. Sumit Anand who is working with ABC Ltd and entitled to a basic salary of Rs. 50,000 per month and dearness allowance (DA) of Rs. 20,000 per month.

Apart from that he is also entitled to a house rent allowance (HRA) of Rs. 25000 per month. He is staying in a rented flat in Bhopal for which he is paying Rs.15000 per month as rent.

Solution: In the above illustration, first we will calculate Salary of Mr. Anand, then HRA exemption.

Basic Salary50,000 per month
DA20,000 per month
HRA received25,000 per month
Rent Paid15,000 per month
Residence CityBhopal (Non metro)

In this illustration, you can see that one of the factors of HRA exemption i.e., “Salary” changed,  so, accordingly HRA exemption amount shall be changed.

Salary for the Purpose of computation of HRA

Basic Salary (50,000 X 12)600,000
DA  (20,000 X 12)240,000
Total840,000

Now, Minimum (least) of the following amount will be exempt from Tax:

a.Actual HRA Received (25,000 X 12)300,000
b.Actual Rent Paid – 10 % of Salary [(15,000X12) –(10/100X 840,000)]96,000
c.40% of the Salary*336,000

*City of Residence is Indore i.e., Non metro that’s why 40% considered

Thus, Rs. 96,000 will be exempted from tax as House Rent Allowance (HRA) and balance HRA (300,000 – 96,000) of Rs. 204,000 shall be included in gross salary of Mr. Anand and will be taxed.

Illustration C (Change in Rent & Residence City)

Mr. Sumit Anand who is working with ABC Ltd and entitled to a basic salary of Rs. 40,000 per month and dearness allowance(DA) of Rs. 20,000 per month. Apart from that he is also entitled to a house rent allowance (HRA) of Rs. 25000 per month.

He was staying in a rented flat in Indore for which he is paying monthly rent. In Jan 2016 he was transferred to Delhi branch of ABC Ltd. He has paid rent of Rs. 15000 per month form April 2015 to Dec 2015 and from Jan2016 to March 2016 Rs.18000 per month during the F.Y 2015-2016.

Solution:Particulars

Basic Salary40,000 per month
DA20,000 per month
HRA received25,000 per month
Rent Paid (April 2015 to Dec 2015)15,000 per month
Rent Paid (Jan 2016 to March 2016)18,000 per month
Residence City (April 2015 to Dec 2015)Indore (Non metro)
Residence City (Jan 2016 to Mar 2016)Delhi (Metro)

In this illustration you can see that two factors of HRA calculation i.e., “Residence City” (from Delhi to Ghaziabad) and “Rent Paid” changed, so, accordingly HRA exemption amount shall be changed.

Salary for the Purpose of computation of HRA

Basic Salary (40,000 X 12)480,000
DA  (20,000 X 12)240,000
Total720,000

Now, Minimum (least) of the following amount will be exempt from Tax:

a.Actual HRA Received (25,000 X 12)300,000
b.Actual Rent Paid – 10 % of Salary   [(15,000X9 +18,000 X 3) –(10/100X 720,000)]117,000
c.40% of the Salary* (40/100 X 540,000) + 50% of Salary*(50/100 X 180,000)306,000

*City of Residence is Indore (9 months) & Delhi (3 months)

Thus, Rs. 117,000 will be exempted from tax as House Rent Allowance (HRA) and balance HRA (300,000 – 117,000) of Rs. 183,000 shall be included in gross salary of Mr. Anand and will be taxed.

Important Points:

Who is not eligible for HRA Exemption?

Self Employed Person cannot claim HRA exemption benefit

One of the eligibility criteria to claim HRA exemption is that, claimant should be salaried individual.

HRA is accounted for in the case of salaried people under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules.

Self-employed person cannot be considered for HRA exemption under this act, as they do not earn a salary.

However, they can claim benefits on the house rent expenses incurred under section 80GG subject to certain conditions.

What are the proofs to be submitted to claim HRA exemption

Rent receipts of rent paid is usually asked by employer as a proof. It may vary employer to employer.

Some employer asks Rent agreement as a proof of document along with rent receipts.

Employer generally asks his /her employee to submit these proofs two times in a financial year, first at the beginning of the year and second at the end of the financial year.

Rent receipts should have a one rupee revenue stamp affixed where rent paid is more than Rs. 5000, and get the signature of the landlord across it.

Other details such as the rented residence address, rent paid, name of the person who rents it etc., should be mentioned on receipts.

PAN of Landlord is mandatory if Rent Paid exceeds Rs 100,000 P.A.

As per CBDT Circular (08/2013) dated 10th Oct 2013, reporting of PAN of the Landlord to employer is mandatory, if annual rent paid by an employee exceeds Rs. 100,000 per annum or Rs.8333 per month.

In case the Landlord does not have a PAN, a Declaration to this effect from the Landlord along with the Name and Address of the Landlord should be filed by the Employee.

Benefits of HRA in case of Rent Paid to Parents

If you are residing in a house owned by your parents, in that case you can pay rent to your parents. Technically, in that case your parents would be considered as landlord.

Thus, you can claim exemption or benefits of HRA; however, your parents need to include the same transaction into his/her taxable income or need to pay tax on the same.

Benefits of HRA in case of Rent Paid to Spouse

Benefits oh HRA won’t be available in case of rent paid to spouse. You can’t pay rent to his or her spouse to claim benefits of HRA. It is not viewed as commercial transaction in the eyes of Tax Laws.

If you take a residence to stay together, you are expected to do because Spouses are meant to stay together.

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