How to Calculate HRA from Basic salary

How to Calculate HRA from Basic salary

HRA is house rent allowance paid by company to meet your rent expenses and this amount is tax deductible (tax free) up-to some extent. This tax deductible amount is calculated on the basis of 3 rules defined by house rent allowance rules and regulations of Income tax department.


If you are a salaried professional and living in a rented house, HRA exemption is one of the most lucrative tax saving option, under Section 10 (13A) of the Income Tax Act.For self employed HRA tax deductions under Section 80 GG are available.


House Rent Allowance (HRA)


Important component of salary structure and is given by employer to meet the expenses of a rented house/accommodation taken by employee.


HRA ranges from 40% – 60% of basic salary


HRA is 40% of basic salary – Non metro cities

HRA is 50% of basic salary  – Metro Cities


An employee must satisfy following conditions –


He must be staying in rented apartment

He must provide rent receipts to the employer.

The rented apartment must not be owned by the employee.

Calculation of exemption on HRA


Amount will be exempted from IT deduction on HRA.


Actual HRA received from employer.

Actual rent paid by employee minus 10% of salary(basic salary + DA-Dearness Allowance)

50% of salary (basic salary+DA) if employee lives in metro city and 40% of salary (basic salary+DA)  if employee lives in non-metro city.

The minimum of the above amount is deducted (minus) from the annual HRA and the resulting amount is subject to IT deduction.


EXAMPLE :


X stays in metro city. His salary structure is –


Break-up Monthly (M) Annual (M*12)

Basic 5000 60000

DA 2000 24000

HRA 2500 30000

Actual rent 2500 30000


Calculation


–          Actual HRA received = 30,000


–          Rent paid minus 10% of (basic+DA) = 30000-10% (84000)  = 30000 – 8400 = 21,600


–           50% of (basic salary+DA) = 50% of 84000 = 42,000


Exempted limit of HRA = 21,600


Balance  HRA amount = 30000 -21600 = 8400 will be included in gross salary for Income tax deduction .


Conclusion:

From this Assessment Year, it will be difficult to show inflated house rents which are actually not paid. It is due to the fact that if House Rent paid is more than 1 Lakh per year  then PAN of House owner must be submitted along with Rent receipt.  As the excess amount shown will not match with returns submitted by owner, it may cause for observations.   It is advisable to show correct amounts to avoid any hassles.