HRA or House Rent Allowance is a component of salary provided by an employer to an employee to help them meet the cost of renting a house. It is a popular tax-saving tool for salaried individuals, and the HRA calculation is based on a few factors, such as the employee’s salary and the amount spent on rent. Here’s how the HRA is calculated for salary:
- Basic Salary
The first step in HRA calculation is to determine the basic salary of the employee. The HRA is generally calculated as a percentage of the basic salary, and the percentage may vary from company to company.
- Actual Rent Paid
The second factor in HRA calculation is the actual rent paid by the employee for the rented accommodation. The rent paid should be for the accommodation in the city or town where the employee is employed. The employee needs to provide the rent receipts to the employer to claim HRA.
- Place of Residence
The HRA calculation also takes into account the place of residence of the employee. The HRA received by the employee is based on whether they live in a metro or non-metro city. The HRA rate is higher for metro cities compared to non-metro cities.
- HRA Exemptions
There are exemptions on the HRA calculation that are allowed under Section 10(13A) of the Income Tax Act. The minimum of the following three amounts is exempt from tax:
- The actual HRA received
- 50% of the basic salary if the employee lives in a metro city or 40% of the basic salary if they live in a non-metro city
- Actual rent paid minus 10% of the basic salary
For example, if an employee’s basic salary is Rs. 30,000 per month and they pay Rs. 12,000 as rent for accommodation in a metro city, the HRA calculation would be as follows:
- HRA received by the employee is Rs. 12,000 per month
- 50% of basic salary (Rs. 15,000) is higher than the actual HRA received, which means that Rs. 15,000 will be exempt from tax
- The remaining amount of Rs. 9,000 (Rs. 12,000 – 10% of Rs. 30,000) is taxable
Therefore, the taxable HRA in this case is Rs. 9,000 per month.
In conclusion :
The HRA calculation is an important aspect of salary for employees and employers alike. It is important for employees to understand the HRA calculation to ensure that they receive the maximum tax benefits. Employers must also calculate the HRA accurately and provide the necessary documentation to their employees to claim HRA.