Do you know how to calculate HRA in salary?
HRA or house rent allowance is an integral part of employee salary and both employers and employees need to know how to calculate it. It helps employees to avail tax benefits. This article discusses HRA calculation with an example.
Read on to know more.
What is HRA?
House rent allowance is a component of the salary given by an employer to the employee. This allowance is given to help the employees meet the expenses of renting a house or accommodation for their residential needs.
HRA varies from city to city. It also varies depending on the cost of living in that particular city. The amount received as a part of the House Rent Allowance (HRA) can be deducted from the taxable salary under section 10(13A).
As per the Income Tax Act 1961, a part of the HRA received by an employee is exempt, and the rest is taxable. Certain conditions are applied to calculate the amount of HRA which is allowed as a deduction from the total salary. The HRA calculation for income tax involves calculating the exemptions and deductions.
How to calculate HRA exemption?
HRA is that component of an employee’s salary that helps reduce their tax. The taxpayer can avail this benefit if they live in rented accommodation. But how is HRA calculated? Let us understand the process of HRA calculation for income tax.
Factors that affect HRA calculation
- Salary – The basic salary that the employee receives. In this case, the basic salary does not include any allowances except a dearness allowance. The basic salary for HRA calculation is estimated by adding basic salary, dearness allowance, and sales commission.
- HRA received – It refers to the actual amount of house rent allowance received by the employee.
- Actual Rent Paid – The actual amount that the employee pays as rent for residential purposes.
- City of Residence – The city in which the employee resides. It depends on whether it is a metropolitan city or a non-metropolitan city.
HRA calculation for tax
The amount of HRA that can be availed as an exemption from the taxable salary is calculated using the following HRA calculation formula.
The least among the following can be claimed as an exemption or deduction:
- The actual amount of HRA received by the employee.
- 50% of the basic salary, if the employee resides in a metropolitan city.
- 40% of the basic salary, if the employee resides in a non-metropolitan city.
- Actual rent paid by the employee – 10% of basic salary
The least among the above is considered exempt from the taxable salary.
Basic salary = Basic salary + DA (Dearness allowance)
HRA calculation example
Let us understand the HRA calculation for tax with an example.
Mr. Toshi lives in Kolkata and receives a basic salary of Rs. 50,000 per month and pays rent of Rs. 15000, monthly. He receives an HRA of Rs. 20,000 from his employer.
Here’s how his HRA exemption will be calculated.
|Actual HRA received||20000|
|Actual rent payment – 10% of salary||15000 – 10% (50000)||10000|
|50% of Basic salary (metropolitan city)||50% (50000)||25000|
|Least of the above amounts||10000|
Therefore, Mr. Toshi can claim Rs. 10,000 monthly as a deduction from his taxable salary, which has been derived from the above HRA calculation.
Note: If there is any change in salary or rent paid by an employee, the exemption for that month would vary accordingly. It can be calculated using the above table.
Also, please note that the annual HRA exemption would be the sum of HRA exemptions calculated monthly.
Documents required to claim tax exemption on HRA
To claim tax exemption on HRA, a few documents are needed. These documents prove that the employee has paid rent to the rent owner. Taxpayers can claim exemption on HRA even if they are paying rent to their parents.
- Rent receipts – The most crucial document that has to be furnished while claiming exemption on HRA are rent receipts. These receipts act as proof of rent payment.
- PAN details of the landowner – The PAN number of the landowner is required by the income tax department to verify if they have received the rent. It is required if the annual rent is more than INR 1 lakh.
- Self-declaration – If the landowner does not have a PAN card, they can provide a self-declaration quoting the same.
Tax benefits for HRA
HRA is a component of the salary paid by the employer to the employee towards the payment of rent of accommodation. The amount of HRA the employee receives can be claimed as a deduction, either fully or partially, from the taxable salary under section 10(13A) of the Income Tax Act, 1961. The amount of deduction allowed depends on the individual’s salary and the HRA formula.
Automate HRA calculation using RazorpayX Payroll
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
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Who can claim an exemption on HRA?
Any salaried individual can claim an HRA exemption. But, not all salaried people are allowed to get an HRA exemption. Only those paying rent for residential purposes can claim this benefit.
Can I claim an HRA exemption even if I pay rent to my family members?
Yes, you can claim HRA exemption even if you pay rent to your parents. But, this is not applicable to the payment of rent to the spouse. But, make sure you have all the relevant documents of proof to verify the payment.
Can tax exemption on HRA and deduction on home loans be claimed at the same time?
Yes, you can claim deduction on HRA and home loan both if you have a home loan for a house in another city and are living on rent in a different city.
Is it necessary to provide HRA to employees?
Yes. Ideally, HRA should be a part of the salary structure of the employees.