House Rent Allowance (HRA) serves as a crucial component of an individual's salary. It defines the total amount allotted by the employer towards the employee's accommodation as rent. The amount allotted for HRA proves to be beneficial for an employee as it is calculated for tax deductions for a particular financial year. HRA also helps in reducing the taxable income that you are liable to pay. The tax benefits associated with HRA are only applicable for those salaried individuals who stay in a rental accommodation. If an employee stays in his or her own house, he or she is not eligible to claim the amount for tax deductions.
The calculation of HRA for tax benefit is considered from any of the following three listed provisions:
The actual rent that is paid should be less than 10% of the basic salary.
In case you?ÇÖre staying in a metro, 50% of the basic salary and 40% if you live in a a non-metro city.
The actual amount allotted by the employer as the HRA
The least of the aforementioned amount will be considered for tax deduction from HRA. There are few rules that are applicable for HRA claims.
Example:
In order to understand how to calculate HRA for an employee, let us consider an example of Mr. Ajay Sharma. Ajay resides in New Delhi in a rented accommodation, paying a rent of Rs. 10,000 per month. Here?ÇÖs what his payslip looks like:
Basic: 30,000
HRA: 13,000
Conveyance: 3,000
Special Allowance: 2,000
Medical expenses: 1,250
LTA: 5,000
Total Earnings: 54,250
PF: 2000
Professional Tax: 200
For the purpose of calculating Mr. Ajay?ÇÖs HRA that is exempt from Income Tax, we have the following information:
His basic salary is Rs. 30,000 per month, which will be considered since there is no commission or dearness allowance
HRA provided by company is Rs. 13,000 per month
10% of the annual basic salary comes to Rs. 36,000
Now, let?ÇÖs calculate the same in the following three scenarios:
Amount received as HRA from employer = Rs. 13,000 X 12 (months) = Rs. 1,56,000
Actual rent paid less 10% of basic = (Rs. 10,000 X 12) ?Çô Rs. 36,000 = Rs. 84,000
50% of basic salary since he lives in a metro = Rs. 1,80,000
Hence, based on the above calculation, it is evident that the HRA amount, which will be exempt from tax for Mr. Ajay, will be Rs. 84,000 as that comes to be the least of the three amounts in the scenarios stated above.
A major benefit of the house rent allowance is that it serves as a medium to reduce the taxable income, which therefore leads to a reduction in the tax that you have to pay.