House Rent Allowance, commonly termed as HRA can be described as an amount paid by an employer to his employee as a part of the salary component. This is defined under section 10(13A) of the Income Tax Act, 1961. In layman’s term, this part of our salary is an exemption from tax i.e. we do not need to pay taxes on the same. But yes, there are a few conditions that we need to fulfill to claim HRA as an exemption.
What Is HRA?
HRA, as the name suggests, is an allowance that is used to meet the cost of our living in a rented accommodation. So what we spend towards renting a house in a year and that portion for which we get the exemption is our HRA for the year.
Therefore, the major benefit of HRA is that it serves as a medium to reduce the taxable income, which thereby leads to the reduction in the taxes that we need to pay.
Conditions to Fulfill HRA Claim
There are a few conditions that we need to fulfill to claim HRA exemption as discussed below:-
- Only salaried individuals can claim HRA (Please note that self-employed individuals cannot claim HRA);
- We need to stay in a rented accommodation to claim HRA;
- The rent should exceed 10 percent of our salary;
- HRA component should be included in our salary
One more thing to note here is that in case the annual rent is more than INR 1 lakh, the landlord’s PAN is a must to claim HRA exemption. In case the landlord does not have a PAN in his/her name, a signed declaration will be sufficient. However, if we are unable to produce either of the two, we may lose out on the tax deduction.
We can also claim HRA benefit even if we own a house/ property and live in rented property.
City-Wise Calculation of HRA
The HRA exemption differs from one city to another. Therefore salaried class should take note of the same before claiming the amount of HRA. For the people working in private sector organizations, HRA component is 50 percent of the basic salary in metro cities. However in non-metro cities, the HRA component is 40 percent of the basic salary (subject to terms and conditions).
Note: The HRA for a salaried employee cannot exceed more than 50 percent of the basic salary.
Now coming on to central government employees, the minimum and maximum HRA in different cities had been revised in July 2017 post the recommendations of the 7th Pay Commission. As per the recommendations, cities have been divided into three parts- X, Y and Z.
|City Category||Population in the city||Calculation of HRA (percentage of salary)||Minimum HRA (in Rs.)|
|X||Above 50 lakhs||30 percent||INR 5,400|
|Y||Between 5 lakh to 50 lakh||20 percent||INR 3,600|
|Z||Below 5 lakh||10 percent||INR 1,800|
Note: The calculation in the above table has been highlighted assuming that Dearness Allowance (DA) crosses 100 percent of the salary. In case DA crosses 50 percent, HRA percentage will be 27%, 18% and 9% for cities X, Y and Z respectively.
Cities in category X include the likes of Delhi, Chennai, Bengaluru, Mumbai, Pune, Kolkata, Hyderabad, Greater Mumbai and Ahmedabad. Other major cities other than those mentioned above are included in category Y. Smaller cities are considered in category Z.
(Note : The following cities are included in category Y:- Jabalpur, Kolhapur, Vasai-Virar Cty, Malegaon, Vijaywada, Warangal, Greater Visakhapatnam, Guntur, Nellore, Raipur, Rajkot, Jamnagar, Bhavnagar, Vadodara, Surat, Faridabad, Gurgaon, Srinagar, Jammu, Durg-Bhilai Nagar, Mysore, Gulbarga, Kozhikode, Kochi, Thiruvanthapuram, Thrissur, Malappuram, Kannur, Kollam, Gwalior, Indore, Bhopal, Jamshedpur, Dhanbad, Ranchi, Bokaro Steel City, Belgaum, Hubli-Dharwad, Mangalore, Dehradun, Moradabad, Meerut, Ghaziabad, Aligarh, Agra, Bareilly, Lucknow, Kanpur, Allahabad, Guwahati, Patna, Chandigarh, Nanded-Waghala, Sangli, Cuttack, Bhubaneswar, Raurkela, Amritsar, Jalandhar, Ludhiana, Puducherry, Bikaner, Tiruchirappalli, Madurai, Erode, Gorakhpur, Varanasi, Saharanpur, Noida, Firozabad, Jhansi, Jaipur, Jodhpur, Kota, Ajmer, Salem, Tirupur, Coimbatore, Amravati, Nagpur, Aurangabad, Nashik, Asansol, Siliguri, Durgapur, Ujjain, Bhiwandi and Solapur)
How Is HRA calculated?
Before jumping into how HRA is calculated we need to first understand what is meant by the term ‘salary’. This term includes basic salary, dearness allowance and any other commissions received by a salaried individual.
Further, HRA that will be allowed as exemption from income tax will be least of the following:-
- Actual rent minus 10 percent of the basic salary;
- Actual HRA offered by the employer;
- 50 percent / 40 percent of the basic salary (depending on the city of the employee)
It might look confusing at first look but an example will clear all the doubts.
Let us consider the case of Mr. Amit, a salaried employee from Mumbai. He is living in a rented accommodation in Mumbai where he pays INR 20,000 as rent.
The table below highlights his salary structure:-
|Salary Component||Amount (INR)|
Now that we have the salary break-up we can calculate the HRA (least of the following):-
- Actual rent paid minus 10 percent of the basic salary = 20,000 – (10% of INR 45,000) = INR 15,500;
- Actual HRA offered by the employer = INR 15,000
- 50 percent of the basic salary = INR 25,000
The least of the following is the actual HRA received by Mr. Amit from his employer i.e. INR 15,000. Therefore, he will get an HRA exemption of INR 15,000 from his taxable income.
Scenarios When HRA Cannot be Claimed
While the HRA is offered to almost all the salaried employees, however there are scenarios wherein HRA cannot be claimed. Few of the scenarios are discussed below:-
- Since HRA is provided by the employer to meet the cost of rented accommodation, we cannot claim HRA when we are living in a self-owned house;
- If we are staying with our parents and produce a rent receipt in their name, we can claim the exemption. However, we need to ensure that our parents need to add the same rent into their income at the time of filing their tax returns;
- Also, we cannot pay rent to our spouse and claim HRA deduction on it
In addition to the above as discussed above, we need to showcase either the landlord’s PAN or a signed declaration by them.
How to Use an HRA Calculator?
To use the HRA calculator as shown in the article, we need to feed in the following information:-
- Basic salary received by us (Refer to the example above wherein the basic salary of Mr. Amit was INR 45,000);
- Dearness Allowance received as part of the salary;
- HRA received (As highlighted in the salary payment/ slip);
- Total rent paid by an individual (per annum)
- We also need to mention whether we live in a metro or a non-metro city as the HRA percentage varies in either of the cases
Once we have provided this information, we need to press calculate to get the figure of our HRA for the entire year.
Also as there are doubts whether tax deduction of home loan interest paid during the year can be claimed along with HRA. The answer to this question is yes these can be claimed simultaneously.
Note: Home loan interest can be claimed under section 24b and housing loan repayment is permitted under section 80C of the Income Tax Act, 1961.
The calculator provided above is simple and handy and lets us calculate our HRA for the entire year very easily. HRA is a major part of our salary and its exemption can help us save a major part of our taxes. Many individuals at the edge of 20% and 30% tax slabs find it really useful to bring the taxable income to lower tax slabs.
Now that we have discussed this topic in detail, make use of this calculator fully to minimize the tax outflow.