How to calculate tax exemption on HRA?

If you are also a paid employee, then you will get House Rent Allowance (HRA). Now that the last date for filing Income Tax Return (ITR) is getting closer, we are telling you how you can claim tax exemption on HRA.

According to the Income Tax Law, exemption on HRA is available under section 10 (13A). Let us know how you can save tax through HRA?

Total taxable income is calculated by subtracting HRA from total revenue. Keep in mind that if the employee stays in his house or does not pay the rent of the house, then the amount received as HRA in his salary comes under the tax net.

What is the HRA (House Rent Allowance)?

HRA is an allowance given to the employee. The employer provides this allowance to his employer to pay the rent of his house. This allowance is taxable when it comes into the hands of the employee.

HRA may be taxed subject to certain limitations laid down in the Income Tax Act, Section 10(13A). Tax can be saved on the income earned as HRA only by a working person whose salary includes HRA and lives in a rented house. The person doing his employment does not get the benefit of tax exemption on HRA.

How hra calculation is done?

These are the methods of hra calculation available for your annual/monthly HRA:

  • HRA received 40% of basic salary (50% of salary if the rented property is in Mumbai, Delhi, Chennai or Kolkata)
  • The remaining amount after deducting 10% of the wages from the paid rent.
  • Whichever is the least, tax exemption on HRA can be availed on that amount.

Condition for tax exemption on HRA

  • This deduction can be taken only when the employee has paid the rent for the purpose of living.
  • Income tax officers can ask for a receipt of paid rent as proof.
  • No documents have to be given while filing Income Tax Return (ITR).
  • If there is any change in the amount of salary, rent or HRA in the middle of the financial year or the accommodation has changed from metropolitan to small town; then the deduction will be calculated on a monthly basis.
  • If the rent of the house is paid to any member of the family, then the deduction will also be available on the HRA.
  • If the employee owns a house but resides in a rented house in the same city or another city, he can still get tax exemption on HRA.
  • Tax exemption on house rent allowance, tax rebate on interest paid on home loan (section 24b) and rebate under section 80C on repayment of housing loan can be taken simultaneously.
  • If the employer is not given HRA in salary to the employee, then income tax relief under this section will not be available. However, the deduction can be taken under section 80G for the paid rent.

How will HRA be calculated?

Suppose the basic salary and dearness allowance (DA) of an employee are Rs 40,000. He gets Rs 20,000 as HRA from his company. He pays the rent of his house in Employee Delhi for Rs. 15,000.

  • Total Salary for the year – Rs. 4,80,000
  • Amount received as HRA – Rs. 2,40,000 * Actual Rent – Rs. 1,80,000
  • Lowest Amount = Actual Rent Paid – 10% of salary = 1,80,000-48,000
  • = Rs 1,32,000

According to the hra calculation, this employee will get a tax rebate of Rs 1,32,000 out of the amount of HRA received from the employer, while the remaining Rs 1,08,000 received under this head will have to pay income tax.

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