Explained: How To Calculate House Rent Allowance (HRA)

Explained: How To Calculate House Rent Allowance (HRA) 

Everyone needs a house. It is a basic need for every individual. While many people have their own homes, a lot of other people have to rent homes or properties and pay for their accommodations monthly or yearly. As the housing comes under the basic need of an individual, that is the reason why it simultaneously comes under the Income Tax Act, 1961. According to this act which introduces the concept of house rent allowance, an individual will be allowed to claim the tax benefits for the rental expense the individual sustains during their accommodation period. For more information, you can opt for HRA deduction.

What is the meaning of House Rent Allowance?

The House Rent Allowance, also known as HRA, is a type of allowance that is paid by the employer to those employees who stay in rented houses or flats. It is a form of employee compensation for salaried employees. Its real benefit is that HRA is a tax-exempt allowance where the employees can claim tax exemption on the remittance they employees are receiving from their employers. But the remuneration needs to be used solely for rental purposes.

HRA is considered a basic element that the employers pay to their employees and with which the employees can let down their salaried income.

How salaried individuals can calculate HRA deduction in Income Tax?

As mentioned above, salaried employees can certainly get an HRA deduction in income tax that they receive from their employers. For your information, the HRA deduction for the salaried individual comes under Section 10-13A of the Income Tax Act, 1961. According to this, the lowest amount from a total of three kinds of payments will be exempted for every salaried individual.

The following are the three kinds of payments from which the lowest amount will be selected for your HRA:

  • The amount of rent paid after deducting ten percent of the basic salary from the total paid amount. For example, you receive a salary of 80000/- per month, and the rent you pay is 20000/- per month. Therefore the tax exemption, in this case, would be 20000 – 10% of 80000/- which is equal to 12000 per month, and the annual exemption you will receive is 1.44 lakh if this is considered the lowest amount.
  • The actual amount of House Rent Allowance you receive from your employer. For example, you receive 15000 as HRA from your employer.
  • Fifty percent of the basic salary you receive from your company or employer, but here the rates also differ because if you live in a metropolitan city such as Mumbai, the rate will remain the same, but if you are not staying in a metropolitan city then the rate will reduce to forty percent. For example, if your basic salary is 80000/- then 50% of 80000/- is equal to 40000/- and forty percent of 80000/- is 32000/-.

In this case, out of the above three, the lowest amount will be considered HRA deduction, which is 12000 per month or 1.44 lakhs per annum or every financial year.

Things to remember for calculating HRA deduction

To perfectly calculate the HRA deduction or HRA exemption you will receive in a financial year, you need to remember the whole Section 10-13A and Section 80GG and each and every rule pertaining to the ruling, which can get trickier. But there is another way to calculate the HRA deduction, you can simply search for an online HRA calculator. But you need to remember the following things before you can calculate your HRA deduction through an online HRA calculator:

  • The actual amount of paid rent
  • The location of your accommodation
  • The basic salary you receive from your employer, including the dearness allowance or DA.
  • HRA is paid by the company or employer.

HRA can be a tricky matter for you to handle, but you can also take the assistance of companies like turtlemint, who will be able to aptly guide you through the process.

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