What is HRA? How to Calculate House Rent Allowance
HRA is a part of the salary provided by an employer to his employee for his rented accommodation. HRA exemption can be claimed only if the employee is residing in a rented house.
House Rent Allowance or HRA is a part of the salary provided by an employer to his employee for his rented accommodation. HRA exemption can be claimed only if the employee is residing in a rented house. It comes under Section 10 and the exemption from tax can be claimed partially or fully. HRA is a useful allocation of your salary component to save tax.
The calculation of HRA depends on mainly four factors viz:
- Gross Salary
- HRA Percentage of Salary
- House Rent
- City of Rented accommodation
How HRA is Calculated?
Mentioned below are the 3 provisions based on which the actual HRA is calculated. The lowest amongst these 3 HRA calculations is considered for deduction.
- The HRA amount received from the employer
- Actual amount paid for rent minus 10% of basic salary
- 50% HRA if the employee is staying in a metro city and 40% HRA for non-metro cities
Let’s take an Example:
- Let Tina’s salary be Rs 50,000 per month (basic pay).
- HRA provided by employer is Rs 20,000.
- 10% of annual basic salary is Rs 60,000.
Tina stays in New Delhi (Metro City) in a small accommodation and pays Rs 15,000 rent per month.
Let’s calculate HRA under its 3 provisions:
- Amount received as HRA from the employer = Rs.20,000 × 12 = Rs 2,40,000
- Rent paid minus 10% of basic = Rs (15,000×12) - 60000 = Rs.1,20,000
- 50% of basic salary = Rs.3,00,000
So the HRA amount that will be exempted from income tax will be the lowest#2 i.e. Rs.1,20,000.
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