House Rent Allowance or HRA is an allowance given by the employer to the employee for taking care of his rental or accommodation expenses. Note that your employer can choose to offer you HRA in your salary package irrespective of whether you live in a rented accommodation or in your own house. While most of us receive HRA, very few understand how the income tax department treats it. An understanding of the same will enable us to use it efficiently. House rent allowance exemption is dependant on a simple calculation but let us first look at the pre-conditions of who is eligible for HRA exemption.
Eligibility for House Rent Allowance (HRA) exemption
To be eligible for HRA exemption, you must first receive HRA in your salary and live in a rented accommodation for which you pay the rent. So if you live in a house you own, you will not be eligible for HRA exemption.
To claim HRA exemption:
- you should receive HRA from your employer in your salary
- you should live in a rental accommodation for which you pay the rent
- your rent should be more than 10% of your salary
Calculation of House Rent Allowance (HRA) exemption
The actual HRA that is exempt from tax is the lowest of the three :
- Actual HRA received from employer
- 50% of salary in case of metros or 40% in case of non-metros
- Actual rent paid minus 10% of salary.
Definition of salary : In the context of tax exemption for House Rent Allowance, salary is defined as sum total of basic, dearness allowance and a percentage of commissions of turnover achieved by employee.
Example of House Rent Allowance (HRA) calculation
If X earns Rs 6,000/- basic salary per month and the dearness allowance is 80% of basic, let us try and find out what will be the taxable HRA if X is staying in say, Delhi and his employer is paying an HRA of Rs 2,500 per month while he pays a rent of Rs 3,000 per month.
Let us calculate the salary first.
Salary = (6000*12) + (0.80*6000*12) = 1,29,600 Rs per annum.
Now let us get the three values as mentioned in the calculation above.
- Actual HRA received = 2500 * 12 = Rs 30,000.
- Since X is based in Delhi, we will take 50% of his salary, which comes to 1,29,600/2 = Rs 64,800/-
- Actual rent paid = 3,000 * 12 = Rs 36,000/- and 10% of salary is = 0.10 * 1,29,600 = 12,960/- Rs. The difference comes to 36,000 – 12, 960 = 23,040/- Rs
The minimum of these is Rs 23,040. So Rs 23,040 of HRA is exempt from tax. The rest, which is 30,000 – 23,040 = Rs 6,960 is taxed.
Other considerations of House Rent Allowance
# If you stay in a house which belongs to your parents and you pay rent to them, then you can claim HRA. However, the income that your parents earn will need to be shown as salary in their income tax returns.
# Rent receipts need to be produced as proof to your employer to show that you are indeed paying rent and to claim HRA.
# If you own a home and have a home loan on it, you can still avail of the HRA benefits along with the home loan tax benefits. It does not matter where your house is located, both the home loan income tax benefits and the house rent allowance benefits can be availed simultaneously. If your home is in the same city as you are rented in, you can justify why you have chosen to stay on rent and still claim the HRA exemption.