House Rent Allowance (HRA)

Hello Friends ..

Here we are going to discuss about House Rent Allowance (commonly said as ‘HRA’). Most of the salaried individuals are often explained in a manner that is hard to even understand, forget applicability and exemption available.

History

HRA was paid to the employees to allow them  to offset the rental cost in the city of employment. Accordingly, the amount paid was exempt by the Government considering the nature of it being compensate the rent paid by the employee.

Computation

Now first of all we need to understand here that HRA is NOT EXEMPT. The amount in salary received is fully taxable as any other component of the salary. The exemption is granted the least of the three components which are as follows :

  1. Actual HRA received
  2. Rent paid in excess of 10% of (Basic Salary + DA)
  3. 50% / 40% (depending on the place of residence) of (Basic Salary +DA)

Confused ..

Lets understand it with an example now. Lets Suppose Mr. SMART receives the monthly salary as follows :

  1. Basic Salary : Rs. 1,00,000
  2. House Rent Allowance : Rs. 50,000

He pays rent of Rs. 40,000 for the house in Delhi (eligible for 50% exemption)

Now, the exemption will be least of following :

  1. Actual HRA : Rs. 50,000
  2. Rent paid in excess of 10% of the basic salary : Rs. 30,000 (40,000 – 10,000)
  3. 50% of the Basic Salary : Rs. 50,000 (50% of Rs. 100,000)

Now the taxable salary for Mr. SMART is as follows :

Head            Total                    Taxable                 Exempt

Basic       Rs. 100,000       Rs. 100,000            Rs. Nil

HRA          Rs. 50,000          Rs. 20,000        Rs. 30,000 (least of the three of the above table)

Now the taxable monthly salary of Mr. SMART is Rs. 120,000.

HRA Calculator : HRA Calculator

Change to the parameters

The calculation of exemption is subject to the following components :

  1. Basic Salary
  2. House Rent Allowance
  3. Rent paid
  4. City of residence (movement between cities eligible for 50% / 40% exemption)

If any of the above component changes during any time during the year, the computation of exemption is bound to change. So, we should recompute the exemption in case any of the above component changes.

Cities eligible for 50% exemption of Basic Salary

Delhi, Mumbai, Chennai, Kolkatta

For your help we are attaching an excel file that helps you compute the taxability of HRA.

TIPs

In case Mr. SMART is staying in a house owned by his/her parents or any relative, Mr. Smart can pay rent to the landlord and claim exemption. This will also result in legitimate income to the family members and benefit Mr. SMART.

TDS

As per the recent amendments Mr. SMART is bound to furnish the PAN of the landlord in case monthly rent paid is in excess of Rs. 8,333.

For Self Employed :

For self employed, HRA exemption is not available, however they can claim deduction under section 80 GG.

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