House Rent Allowance (HRA) – Meaning, Calculation, Tax Exemption Rules

HRA Meaning

HRA, or House Rent Allowance, is a part of an employee’s salary provided towards expenses related to rented accommodation only. HRA is deducted from taxable salary under section 10(13A).

HRA varies from city to city. It also varies depending on the cost of living in that particular city. HRA is calculated and deducted from taxable income based on the city of residence and a few other factors. 

HRA Calculation with Example

HRA calculation involves determining the amount exempt from income tax. The amount of tax deduction that can be claimed over HRA is the lowest of the following:

1. Actual rent paid minus 10% of salary
2. HRA received from employer 
3. City-specific limit
   • 50% of basic salary for those living in metro cities like Mumbai or Chennai
   • 40% of basic salary for those not in metro cities

Let’s take the example of an employee living in Delhi.

• Monthly basic salary: Rs 50,000
• Dearness Allowance: Rs 10,000
• Monthly rent paid: Rs 15,000
• Monthly HRA received: Rs 12,000

Calculating the tax-exempt HRA:

1. Actual rent paid minus 10% of salary: 15000-5000 = 10,000
2. HRA from employer: 12,000
3. City specific limit: 30,000 (50% of basic salary + dearness allowance)

The amount of tax deduction that can be claimed is the least of the above numbers, which is the actual rent paid minus 10% of salary.

In this example, the employee will receive HRA exemption of Rs 10,000 of his total taxable income.

Since the Rs 10,000 of HRA is exempt from tax, it essentially lowers the amount of income the government taxes the employee on. This translates to a lower tax liability for the employee.

Who Can Claim Tax Deduction on HRA?

HRA can be claimed as tax deduction if an employee meets the following criteria:

• Employee is a salaried individual
• Employee should receive HRA as a salary component
• Employee should live in a rented house
• Rent receipts should be issued in the employee’s name

Factors Affecting HRA Calculation

• Salary: Basic salary used for HRA calculation is the sum of basic salary, dearness allowance and sales commission
• HRA received: The actual amount of HRA received by the employee
• Actual rent paid: The amount of rent paid by the employee for his residence
• City of residence: The city in which the employee resides, which depends on whether the city is a metropolitan city or non-metropolitan city

Section 88GG – How to Save Tax If you Don’t Receive HRA

After reading this article, you must have understood what a house rent allowance is and how you can claim an exemption to reduce your overall tax liability. But calculating HRA individually for each employee can be very time-consuming and tiring. 

What if we told you that you could automate it for all your employees?

RazorpayX Payroll automates the process of HRA calculation and saves your precious time. It automatically divides the employee CTC into separate components in just one click. All you have to do is input the CTC and watch everything getting done by the software.

Other features of RazorpayX Payroll include:

• CTC Calculation & salary preview tool
• Automatic generation of HR letters
• Automatic compliance calculation & filings such as PF, PT, TDS & ESIC
• Automated salary calculation and disbursement into bank accounts

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