How to Calculate HRA (Example Included)

 


House Rent Allowance or HRA is a portion of the compensation provided by an employer to his employee for his leased or rented accommodation. The HRA exemption on income tax can be claimed only if the employee is living in a rented place. It comes under Section 10 of the Income Tax Act, 1961. The exemption from tax can be claimed partially or fully depending on the allocated amount. HRA is a valuable allocation of your salary segment to save tax.

According to Section 10(13A) of the Income Tax Act, 1961, a person/employee can claim for deductions in earnings on HRA should they satisfy the basic eligibility requirements mentioned below:

  • The person has to be salaried. 
  • The HRA has to be part of the salary element.  The person must reside in rented accommodation.  
  • The person must pay the house lease.  
This usually means that the leasing agreement has to be produced in the name of the person who wishes to claim the HRA deduction. 

The HRA calculation relies on primarily four factors. They are:
  • Gross Salary
  • HRA Percentage of Salary (provided by the employer)
  • House Rent (actual rent paid)
  • City of Rented accommodation (metro or non-metro)

How is HRA calculated?

House rent allowance or HRA is a vital element of your wages. An employer pays HRA into the worker to supply for his leased accommodation. The Income Tax Act permits a salaried employee to file for HRA exemption under Section 10(13A). When a worker is residing in his house and doesn't pay rent, he can't maintain this exemption. However, he could assert the HRA exemption when he's residing with his parents and paying for rent to them.
  • Actual HRA obtained from the company. 
  • Actual lease paid minus 10 percent of their salary. 
  • 50 per cent of their salary if residing in a subway city or 40 per cent of their salary if residing in a non-metro city.
Salary here signifies basic pay, dearness allowance (if contained regarding labour ), and commission on turnover based on predetermined per cent. The wages are required for the time the worker occupies the lodging. The wages are regarded on due foundation.

The quantity of HRA obtained from the employer following the exemption is added into the entire salary and taxed following the slab rate related to the employee.

HRA calculation example

Let’s consider the below example:
  • Let Mary’s salary be Rs 50,000 per month (basic pay+DA).
  • HRA allocated by employer is Rs 20,000.
  • 10% of basic salary (annual) is Rs 60,000.
Mary stays in Bangalore (Metro City) in a rented apartment and pays Rs 15,000 rent per month.

HRA can be calculated as follows.
  • HRA received from the employer = Rs.20,000 × 12 = Rs 2,40,000
  • Rent paid deducted from 10% of basic = Rs (15,000×12) - 60000 = Rs.1,20,000
  • 50% of basic salary = Rs.3,00,000

So the exempt HRA amount will be the lowest of the above two i.e. Rs.1,20,000.



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