How to Calculate HRA from Basic Salary

• Team Antworks

HRA or the House Rent Allowance is an amount paid by employers to employees as a part of their salaries. It provides employees with tax benefits for what they pay towards accommodations every year.

How is HRA Decided?

HRA is actually decided based on the salary. There are some other factors that affect it which could include things like the city in which the employee resides. If the place of residence is a metro city then employees are entitled to an HRA equal to 50% of the salary. For all others cities the entitlement is 40% of the salary.

The actual HRA offered will be the lowest of the following three provisions:

• The amount received as the HRA from the employer.
• Actual rent paid less 10% of the basic salary.
• 50% of the basic salary if staying in a metro city and 40% in a non-metro city.

House Rent Allowance (HRA) Calculation

The House Rent Allowance (HRA) is an essential component of an individual’s salary that defines the total amount allotted by the employer towards the employee’s accommodation as rent.

The calculation of HRA is based on various factors, such as the entitlement to 50% of the basic salary, if the employee is staying in a metro city (40% for other cities). The calculation of HRA for tax benefit is considered from one of the following three listed provisions:

• The actual amount allotted by the employer as the HRA.
• Actual rent paid less 10% of the basic salary.
• 50% of the basic salary, if the employee is staying in a metro city (40% for a non-metro city).

The least of the above-mentioned amount will be considered for tax deduction from HRA.

HRA claim rules

The following rules are applicable for HRA claims:

• The HRA cannot exceed more than 50% of your basic salary.
• You cannot claim for the full rental amount you are paying. The exemption is based on the least of the following options:

1. The actual amount allotted by the employer as the HRA.
2. Actual rent paid less 10% of the basic salary.
3. 50% of the basic salary, if the employee is staying in a metro city (40% for a non-metro city).

• You can take advantage of tax benefits of HRA along with a home loan.
• If you are staying with your parents, you can pay rent to your parents and collect a receipt for HRA claim. However, the rules don’t allow you to pay rent to your spouse.
• The landlord’s PAN card is mandatory for rent exceeding Rs.1,00,000 per year. The landlord can provide a self-declaration in case if he/she doesn’t have a PAN card.
• If your landlord is an NRI, you must deduct 30% tax from the rent amount that needs to be declared.

Benefits of HRA

The biggest benefit of the house rent allowance is that it provides for an avenue to reduce the taxable income , which in turn leads to a reduction in the tax that you have to pay.