House Rent Allowance (HRA) is a major component of the corporate salary packages. It is an important factor if you are migrating from your hometown for the job. Further, it is even more crucial for people moving to metro cities as they generally prefer living in a rented property because of the high cost of buying a new house. HRA has a huge impact on the taxable income and the actual payable income tax of the working professionals. Also, initially, if one gets the calculation wrong, a lot more tax would be deducted (TDS) and one would have the headache of claiming it back during the Income Tax Returns (ITR) filing process. So let us first understand the rules and regulations of HRA and then look at a few examples.
HRA deduction is the LEAST of the following three amounts calculated annually:
If the annual rent amount exceeds Rs. 1 lakh, PAN of the landlord is mandatory to claim the benefits.
At the end of the financial year, employers generally demand proof of actual rent payment. A rent receipt can be given as proof containing the address of the property, rent amount, landlord's PAN, landlord's signature on a revenue stamp and employee's signature.
Within certain conditions, an employee can claim both HRA and exemption on Home Loan interest. This can be done if one owns a property in a different city than the work city. There are many other conditions which are out of the scope of this post.
HRA benefits allow for rent payment to parents. If an employee lives along with his/her parents in a house owned by them, s/he can enter into a rent agreement with parents and pay rent to them. The parents must show this rent income in their Income Tax Returns. However, this is only beneficial if the employee's income tax bracket is higher than parents' income tax bracket. For example, if the employee is saving 20% tax on HRA component but the parents are paying 30% tax on their Rent income shown in ITR, this is a loss-making transaction for the family.
Assume a person living in a metro city has a monthly basic salary of Rs. 20000. The monthly HRA component is Rs. 10000 and the actual rent paid is Rs. 15000 per month. The person does not get any Dearness Allowance.
Applying the above 3 conditions:
Example 2: If the person starts paying the rent in the middle of the year.
Let's take the same conditions as above but assume that the person starts paying rent from the month of December instead of at the start of the financial year in April which still earning for the whole year. In this case, the third condition above will change as follows:
3. Actual rent paid minus 10% of (Basic + DA):
- Actual rent paid annually = Rs. 15000 per month * 4 (From December to March) = Rs. 60000
- 10% of (Basic + DA) = 10% of Rs. 240000 = Rs. 24000
- Actual rent - 10% of (Basic + DA) = Rs. 60000 - Rs. 24000 = Rs. 36000
The minimum of the 3 conditions is now Rs. 36000. So the person's taxable income will be reduced by Rs. 66000 only.
Example 3:
Let's carry forward the above examples but assume that the person is receiving a Dearness Allowance of Rs. 40000 per month. Let's recalculate all the above conditions:
I hope this post will clear that confusing HRA component in your payslip and help you calculate your HRA benefits. If you don't get HRA as part of your salary, try requesting your employer to restructure your salary to include it as it may help you save a lot of tax.
HRA Rules and Regulations
HRA can be claimed only for the property rented in the same city as your work place.HRA deduction is the LEAST of the following three amounts calculated annually:
- Actual HRA received (as given on payslip)
- A component of your Basic Salary and Dearness Allowance (DA)
- For metro cities: 50% of (Basic + DA)
- For Non-metro cities: 40% of (Basic + DA)
- Actual rent paid minus 10% of (Basic + DA)
If the annual rent amount exceeds Rs. 1 lakh, PAN of the landlord is mandatory to claim the benefits.
At the end of the financial year, employers generally demand proof of actual rent payment. A rent receipt can be given as proof containing the address of the property, rent amount, landlord's PAN, landlord's signature on a revenue stamp and employee's signature.
Within certain conditions, an employee can claim both HRA and exemption on Home Loan interest. This can be done if one owns a property in a different city than the work city. There are many other conditions which are out of the scope of this post.
HRA benefits allow for rent payment to parents. If an employee lives along with his/her parents in a house owned by them, s/he can enter into a rent agreement with parents and pay rent to them. The parents must show this rent income in their Income Tax Returns. However, this is only beneficial if the employee's income tax bracket is higher than parents' income tax bracket. For example, if the employee is saving 20% tax on HRA component but the parents are paying 30% tax on their Rent income shown in ITR, this is a loss-making transaction for the family.
HRA calculation examples:
Example 1:Assume a person living in a metro city has a monthly basic salary of Rs. 20000. The monthly HRA component is Rs. 10000 and the actual rent paid is Rs. 15000 per month. The person does not get any Dearness Allowance.
Applying the above 3 conditions:
- Actual HRA received (as given on payslip) = Rs 10000 per month * 12 months = Rs. 120000
- For metro cities: 50% of (Basic + DA):
- Annual basic salary = Rs. 20000 per month * 12 = Rs. 240000
- 50% of (Basic + DA) = Rs. 120000 - Actual rent paid minus 10% of (Basic + DA)
- Actual rent paid annually = Rs. 15000 per month * 12 = Rs. 180000
- 10% of (Basic + DA) = 10% of Rs. 240000 = Rs. 24000
- Actual rent - 10% of (Basic + DA) = Rs. 180000 - Rs. 24000 = Rs. 156000
Example 2: If the person starts paying the rent in the middle of the year.
Let's take the same conditions as above but assume that the person starts paying rent from the month of December instead of at the start of the financial year in April which still earning for the whole year. In this case, the third condition above will change as follows:
3. Actual rent paid minus 10% of (Basic + DA):
- Actual rent paid annually = Rs. 15000 per month * 4 (From December to March) = Rs. 60000
- 10% of (Basic + DA) = 10% of Rs. 240000 = Rs. 24000
- Actual rent - 10% of (Basic + DA) = Rs. 60000 - Rs. 24000 = Rs. 36000
The minimum of the 3 conditions is now Rs. 36000. So the person's taxable income will be reduced by Rs. 66000 only.
Example 3:
Let's carry forward the above examples but assume that the person is receiving a Dearness Allowance of Rs. 40000 per month. Let's recalculate all the above conditions:
- Actual HRA received (as given on payslip) = Rs 10000 per month * 12 months = Rs. 120000
- For metro cities: 50% of (Basic + DA):
- Annual basic salary (Basic + DA) = Rs. 60000 per month * 12 = Rs. 720000
- 50% of (Basic + DA) = Rs. 360000 - Actual rent paid minus 10% of (Basic + DA)
- Actual rent paid annually = Rs. 15000 per month * 4 (From December to March) = Rs. 60000
- 10% of (Basic + DA) = 10% of Rs. 720000 = Rs. 72000
- Actual rent - 10% of (Basic + DA) = Rs. 60000 - Rs. 72000 = Rs. -12000
I hope this post will clear that confusing HRA component in your payslip and help you calculate your HRA benefits. If you don't get HRA as part of your salary, try requesting your employer to restructure your salary to include it as it may help you save a lot of tax.
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