How Hra is calculated?

Author : blooms
Publish Date : 2020-07-14


How Hra is calculated?

HRA or House Rent Allowance is part of the total salary paid by employers to employees. It is basically provided to help employees claim tax benefits for the rent of accommodation each year. The decision regarding the amount of HRA is taken by the employer based on various factors such as the city of residence, salary amount, etc. 

The Income Tax Law permits only salaried individuals to claim HRA and its tax benefits. Also, the benefit of HRA exemptions is available only when the employee is living in rented accommodation. The HRA benefit is regulated under Section 10(13A) of the Income Tax Act, and it proves to be quite beneficial to salaried individuals. 

The primary basis for deciding HRA is the salary amount. However, other factors, like the city of residence, are also taken into consideration. In case the individual is living in a metro city then he is entitled to 50% of salary as HRA, and in the case of non-metro cities, 40% of salary as HRA is entitled. 

In order to calculate HRA, the salary includes basic salary plus dearness allowance plus any commission. The House Rent Allowance shows the amount given by the employer to an employee for accommodation purposes. It is a crucial element of an individual's salary. For an individual, it helps in reducing the total taxable income. The benefit of HRA exemption is available only for those salaried individuals who are living in rented accommodation. In case the employee is living in his or her own house, then he or she cannot claim the benefit. However, if they are paying rent to their parents, then they can claim the benefit. 

The HRA calculation for the purpose of taxa benefit is considered lower of the following three: 

  1. Actual HRA received. 

  2. Actual rent paid minus 10% of salary.

  3. 50% of basic salary in a metro city and 40% of basic salary in case of the non-metro city.

Let's consider an example: 

Dhruv living in Mumbai receives a basic salary of Rs. 35,000; HRA is Rs. 16,000, Special allowance is Rs. 3,500, Travel allowance is Rs. 7,000, Medical allowance is Rs. 2,500, Rent paid monthly is Rs. 15,000. 

For the purpose of calculating the HRA exemption under the Income Tax, the following information is crucial: 

  1. The basic salary or salary for the purpose of the calculation is Rs. 35,000 since there is no dearness allowance and commission. 

  2. The HRA received each month is Rs. 16,000.

  3. The 10% of annual basic salary is Rs. 42,000.

The HRA calculation is as follows:

  • Actual HRA received is Rs. 16,000*12 = Rs. 1,92,000

  • Actual rent paid minus 10% of salary is Rs. (15,000*12) - 42,000 = Rs. 1,38,000.

  • 50% of salary/basic salary as Mumbai is a metro city = 2,10,000.

Based on the above HRA calculation, Dhruv can claim Rs. 1,38,000 as HRA exemption while filing his ITR. 

Summary

House Rent Allowance or HRA is a major part of an employee's salary, and it is given by the employer to help employees get tax benefits for renting accommodation in the city of the workplace. The tax benefit of HRA exemption is covered under the provision of Section 10(13A) of the IT Act. The basic salary or salary to calculate HRA benefit is basic salary + dearness allowance + any other commission. The benefit of HRA exemption can be availed only by the salaried individual who is living in rented accommodation. 

The HRA calculation is done by considering the lower of the three: 

  1. Actual rent paid minus 10% of salary. 

  2. Actual HRA received.

  3. 50% of the basic salary for a metro city and 40% of basic salary for the non-metro city. 

Consider an example of Dhani living in Delhi whose basic salary is Rs. 25,000, HRA received is Rs. 11,000, Medical allowance is Rs. 2,000, LTA is Rs. 3,000, rent paid per month is Rs. 10,000. 

The HRA calculation will be: 

  1. (10,000*12) - [(25,000*12)*10%] = Rs. 90,000

  2. 11,000*12 = Rs. 1,32,000

  3. Rs. 1,50,000 

Thus, the exempted HRA is Rs. 90,000.



Category :finance
Author Website : How Hra is calculated?

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