How to Calculate HRA for your salary?

Admin@ | May 1, 2018 | 0 | Finance

What is HRA?

HRA – House Rent Allowance

House Rent Allowance is an allowance that is given to an employee by their employer so that they can meet their housing and residential requirements during the tenure of their job at that particular company. Like food allowance, a rent allowance is given to the employee so that they can rent a house for them to stay in. Now, the home rent allowance is a taxable fund when it is in the hands of the employee or the person receiving the amount as it is treated as an income. Now, if it is a taxable income, tax deductions are also possible on the taxes paid for it. The Income Tax Department is the department that will allow any income tax exemptions on the tax that the employee has paid for the HRA that they have received. The Income Tax Department allows HRA tax exemptions under the Act’s Section 10 (13 A).

The house rent allowance is a type of income as it is given to an employee by an employer. That is the reason that it is treated like an income and income tax is imposed on the allowance received regardless of whether it is a direct salary or not. If income tax is imposed on it, then, it is also open to getting an income tax benefit, accordingly. Now that we know what HRA is, let us discuss how to calculate HRA. The process of how to calculate HRA is extremely easy if you know your numbers.

On what factors is the house rent allowance tax deduction calculated or decided?

There are a total of 3 factors that are to be considered while calculating or determining the deduction on House Rent Allowance. The factors are as follows:

  • The actual rent paid by the employee and resident of the house minus 10 % of their basic salary that they receive for their job.
  • The house rent allowance that is given by the employer to the employee so that they can provide themselves with a resident to stay in.
  • 50 % of the basic salary of the employee in case they are residing in a metro city and 40 % of the basic salary of the employee if they are residing in a non – metro city.

These are taken into consideration when the process of how to calculate HRA comes in!

House rent allowance perks, regulations and tax benefits

House rent allowance tax exemptions can be taken along with house loan. So, you can take up a home loan along with the tax benefits for the house rent allowance.

If the employee is staying with their parents or guardians, they can pay rent to them and the house rent allowance can be taken for the rent that they are paying to stay in their parents’ house. But, the employee cannot pay rent to their spouse to get the house rent allowance. This allows you to get the house rent allowance as well as the house rent allowance tax benefits.

If the house that the employee has rented out to stay in during the tenure of their job at that particular firm and the rent of the house is more than the amount of INR 1,00,000 per year, then it is mandatory that they provide with the landlord’s PAN – permanent account number. But, if the landlord does not have a PAN card to provide, then what they can do is they can self – declare.

If the landlord of the house that the employee has rented out is an NRI (non – resident Indian), then the employee has to deduct 30 % tax from the amount of the rent that has to be declared.

Calculation of the House Rent Allowance for the salary of an employee

How to calculate HRA

Let us take an example!

  • Company or employer – Z Inc.
  • Employee – T
  • Basic Salary of the employee – 30,000
  • House rent allowance of the employee – 13,000
  • Rent paid per month – 10,000
  • Rent paid per year – 1,20,000

Now, the House rent allowance will be calculated for the 3 scenarios that they are calculated on.

The 3 scenarios

  • The actual rent paid by the employee and resident of the house minus 10 % of their basic salary that they receive for their job.
  • The house rent allowance that is given by the employer to the employee so that they can provide themselves with a resident to stay in.
  • 50 % of the basic salary of the employee in case they are residing in a metro city and 40 % of the basic salary of the employee if they are residing in a non – metro city.

The calculation for the 3 scenarios – How to calculate HRA

  • Actual rent paid (yearly) less 10 % of the basic salary
    1,20,000 – 36,000 = 84,000
  • House rent allowance received by the employee from the employee = HRA per year = 13,000 X 12 = INR 1,56,000
  • 50 % of basic salary (metro cities) = 1,80,000
    40 % of basic salary (non – metro cities) = 1,44,000

The scenario which sums up the least amount is taken into consideration.

Now that you know the entire process of how to calculate HRA, you can go ahead and take things into your own hand to see which scenario will benefit you the most and how you can calculate your own house rent allowance and house rent allowance tax as well as the tax refunds that you might be subjected to, so that when it comes to the choosing of the scenarios, you are aware of what to choose and hoe to choose. How to calculate HRA is a very simple process if you look at it carefully.

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