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Understanding how HRA works!

By | Strategic Moves 23 hours ago




The end of another financial year is drawing close and is a couple of months away. The words
"income tax" start ringing a frantic bell towards the end of every financial year, and many
questions arise. Please do note that it is best to be prepared in the beginning rather than the end
of a financial year!
There are many tax components you need to be clear about and also figure out how to plan your
investments to gain maximum returns as well as maximum tax benefits. One such tax component
is the tax benefit you can claim from your house rent allowance. This article helps you
understand how this works!
HRA (house rent allowance) is provided to salaried people under Section 10 (13A) of Income
Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. Self employed professionals are
eligible for tax deductions under section 80GG of Income Tax Act, 1961.
Dependent factors
When you are calculating HRA for tax exemption you take into consideration four aspects which
includes salary, HRA received, the actual rent paid and where you reside, i.e. if it is a metro or
non-metro. If these aspects remain constant through the year, then tax exemption is calculated as
a whole annually, if this is subject to change, as in a rent hike or shift in residence etc. then it is
calculated on a monthly basis.
The place of residence is significant in HRA calculation as for a metro the tax exemption for
HRA is 50% of the basic salary while for non-metros it is 40% of the basic salary.
On paying rent
It is not essential that you should pay rent only to a landlord to avail your HRA benefits. You can
pay rent to your parents to claim tax benefits. However, they need to account for the same under
`Income from house/property' and will be entitled to pay tax for the same.

Remember you cannot try the same with your spouse, as it is not permissible under income tax
law, as you are expected to reside together for all practical purposes.
You need to submit proof of rent paid through rent receipts, for which only two need to be
submitted, one for the beginning of the year and one towards the end of the financial year. It
should have a one rupee revenue stamp affixed with the signature of the person who has received
the rent, along with other details such as the rented residence address, rent paid, name of the
person who rents it etc.
How is HRA calculated
To figure out how much HRA exemption you are eligible for, consider these three values which
includes a. The actual rent allowance the employer provides you as part of your salary, b. the
actual rent you pay for your house from which 10% of your basic pay is deducted, c. 50% of
your basic salary when you reside in a metro or 40% if you reside in a non-metro.
The least value of these three values is allowed as tax exemption on your HRA. You can discuss
restructuring your pay structure with your employer in order to avail the most of your HRA tax
Here is a sample illustration for your understanding:
Sheetal earns a basic salary of Rs. 40,000 per month and rents an apartment in Delhi for Rs.
20,000 per month (hence eligible for a 50% of the basic pay for HRA exemption). The actual
HRA she receives is Rs. 25,000.
These values are considered to find out her HRA tax exemption:
a. Actual HRA received, i.e. Rs. 25,000,
b. 50% of the basic salary, i.e. Rs. 20,000, and
c. Excess of rent paid over 10% of salary, i.e. Rs. 20,000 Ra 4,000 = Rs. 16,000
The value considered for her actual HRA exemption will be the least value of the above figures.
Hence, the net taxable HRA for Sheetal will be Rs. 25,000 16,000 (available HRA deduction)
= Rs. 9,000.
Availing tax benefits on your home loan and HRA
As long as you are paying rent for an accommodation, you can claim tax benefits on the HRA
component of your salary, while also availing tax benefits on your home loan. This could be the
case if your own home is rented out or you work from another city etc. However, you need to
account for any rental income you receive from the property you own.