HRA Calculation: Everything You Need To Know

Written by : Knowledge Centre Team

2024-08-02

1113 Views

Locate branch

Resume journey

Pay Premium

HRA or house rent allowance is probably the second largest number on your salary slip and one of the most prominent allowances. If you are staying on rent HRA is an important tax saving component for you.

Thus, it’s always better if you understand this important component of your total salary, and how you can maximize your benefit from it.

What is HRA?

HRA is one of the few allowances which are still partially exempt and can help you save tax. The employers include this allowance in your salary package to cover the cost of rented accommodation and to pass on the tax benefit related to it.

For the current assessment year, if you are not paying rent but receiving HRA, your entire allowance may be taxable. However, from the assessment year 2021-22, you can keep your tax liabilities lower with the new tax slab scheme.

How Tax Saving Works on House Rent Allowance

House rent allowance is partially exempt depending on a few factors. The first and most crucial factor is, of course, you need to pay rent. If you do not stay on rent, you cannot claim the exemption on HRA. The entire allowance will form part of your gross taxable income, in this case.

Taxability or tax-exemption of HRA depends on the following factors:

City of residence – metro or non-metro
HRA Received
Rent Paid
Income for HRA

You should note that “income” for HRA is different from your CTC or in-hand income. The income for HRA calculations will consist of the following:

Basic salary
Part of Dearness Allowance (DA) which is used for estimating your retirement benefits
Variable Commission linked to turnover attributed to your performance (fixed commission is not considered)

Example of a salary slip with HRA

Thus, for example,

If your salary structure looks something like given in Image 1, your monthly income for HRA calculation will be Rs. 49,000

There is no DA
The fixed commission does not form part of income for HRA estimates

If your salary structure looks like Image 2, your monthly income for HRA calculation will be Rs. 69,200

50% of DA will form part of income for HRA calculation
Still, no variable commission and fixed commission does not form part of income for HRA

Revised Salary & Salary Structure after mid-year job switch

Calculating Your HRA Exemption

HRA exemption depends majorly on two factors and may change throughout the year based on these two:

1. The rent you pay

2. Your salary or salary structure

Any change in these two will warrant you to recalculate your HRA exemption. Although there are other factors too which may need you to recalculate your exemption, they are less prominent. For example, change of employment from a metro city to a non-metro city.

Thus, there would be following three major scenarios:

1. Level income and rent payment throughout the financial year

2. Level income but changed rent payment in the middle of the year

3. Income changes in the middle of the financial year but rent remains the same

You can create more extrapolations of these events but for the majority of the cases, these will be relevant for recalculation.

The HRA is exempt to the extent of the minimum of the following three numbers:

A. Total HRA Received in the FY

B. 50% of Income for HRA Estimates; i.e. Basic + DA + Turnover based commission (40% in case of any other place than Delhi, Mumbai, Kolkata & Chennai)

C. Rent Paid over 10% of Income for HRA purpose

HRA Exemption in Scenario 1 – Unchanged Income & Rent

Assuming your salary remains the same as given in Image 1, and you pay a rent of Rs. 30,000 per month throughout the FY 2019-20.

You can claim Rs. 2.94 lakhs as exemption out of the Rs. 3.12 lakhs of HRA received in the year. Rs. 18,000 will be the taxable HRA and will become part of gross taxable income.

Detailed calculation is given below:

B	Total Rent Paid	3,60,000
C	Total HRA Received	3,12,000
D	50% of Basic + DA	2,94,000
E	Rent Paid over 10% of Income (i.e. Basic + DA)	3,01,200
F	Exempt HRA (Lowest of C, D & E)	2,94,000
G	Taxable HRA to be Part of Gross Taxable Income (C - F)	18,000

Your taxable income will reduce by Rs. 2.94 Lakhs in this scenario.

Note: If you are residing in a non-metro city, estimate of 50% in point D will change to 40% of income for HRA estimate.

HRA Exemption in Scenario 2 – Unchanged Income & Rent Changes

Again, assuming the uniform salary throughout the financial year as per Image 1. But this time your rent payment changes from Rs. 30,000 p.m. to Rs. 35,000 p.m. from Aug 2019.

So, within the first four months of FY 2019-20, you end up paying Rs. 120,000 as rent, while in the last eight months (Aug 2019 – March 2020) you pay a total rent of Rs. 280,000.

		April - July	Aug – March
A	Rent Paid	1,20,000	2,80,000
B	HRA Received	1,04,000	2,08,000
C	50% of (Basic + DA)	98,000	1,96,000
D	Rent Paid over 10% of Income (i.e. Basic + DA)	1,00,400	2,40,800
E	Exempt HRA (Lowest of B, C & D)	98,000	1,96,000
F	Taxable HRA to be Part of Gross Taxable	6,000	12,000
	Income
	Total Taxable HRA in AY 2020-21		18,000

In this scenario, the change in the rent payment failed to affect your HRA exemption. Thus, your taxable HRA remains the same. Can you spot the reason why?

Your taxable income reduces by Rs. 2.94 Lakhs in this scenario.

HRA Exemption in Scenario 3 – Income Changes & Rent Stays the Same

This time while you keep on paying the same Rs. 30,000 a month as rent, your income changes from the salary slip in Image 1 to Image 2 from August 2019.

Meaning, your net monthly income will be Rs. 69,200 for HRA calculation. Which is the sum of your new Basic Salary and 50% of the dearness allowance (DA).

Your HRA Exemption will play out as given below in this scenario:

		April - July	Aug – March
A	Rent Paid	1,20,000	2,80,000
B	HRA Received	1,04,000	2,80,000
C	50% of (Basic + DA + Variable Commission)	98,000	2,76,800
D	Rent Paid over 10% of Income (i.e. Basic + DA)	1,20,000	2,40,000
E	Exempt HRA (Lowest of B, C & D)	98,000	2,40,000
F	Taxable HRA to be Part of Gross Taxable Income	6,000	40,000
	Total Taxable HRA for FY 2019-20		46,000

With the increase in salary coupled with the changes to salary structure increases your taxable HRA amount from Rs. 18,000 to Rs. 46,000.

Your taxable income reduces by Rs. 3.38 Lakhs in this scenario.

So, you can see HRA and rent payment can help reduce your taxable income to a great extent. However, you may have to recalculate your HRA exemption more than once even if your income stays the same if your salary includes turnover based commission.

Since you cannot predict the amount of commission income you will receive through the year, you will need to recalculate HRA at the end of the financial year.

FAQ

Income tax in India is based on incremental slab rates. The rate of tax is higher on higher income. You can also avail deductions from your taxable income if you invest in eligible instruments like PPF, NPS, ELSS, ULIPs, etc. Starting AY 2020-21 you have two tax regimes – old and new. The old tax regime has all the deductions from gross total income, while the new tax regime offers a lower rate of tax. So, if you are not investing in tax-saving instruments you can file your tax as per the new tax regime.

You can avail additional tax savings under the following sections other than section 80C:

a) Section 80D: Health insurance premium payments for family and parents up to Rs 75,000
b) Section 80CCD(1B): Self-contribution to NPS Tier-I account above 10% of salary or 20% of income if self-employed up to Rs 50,000
c) Section 80E: Education loan interest paid through the year
d) Section 80EE: Home loan interest paid up to Rs 50,000
e) Section 80G: Charitable contributions to non-profit organisations registered under section 12A up to 50% or 100% of the contribution
f) Section 24B: Interest paid on home loan

You have many tax-saving investment options. You can consider the following popular tax-saving schemes to save tax:

a) Term life insurance plan
b) Health and critical illness insurance plan
c) Life insurance plans such as endowment and moneyback plans
d) Pension plans from life insurance companies
e) Public Provident Fund (PPF)
f) National Pension System Tier-I account (NPS)
g) Employee Provident Fund (EPF)
h) Unit Linked Insurance Plans (ULIPs)
i) Equity Linked Savings Scheme (ELSS)
j) Senior Citizen Savings Scheme
k) Sukanya Samriddhi Yojana
l) 5-Year Tax Saving Fixed Deposits
m) National Savings Certificate (NSC)

Deduction of Rs 1.5 or 2 Lakhs under section 80C is available when you make investments or spend money under the heads mentioned in the Chapter VI A of the Income Tax Act, 1961. All tax-saving investments like PPF, NPS, ULIP, ELSS, etc. and all tax-saving expenses like children’s tuition fees, and registration expenses of a house property are part of Chapter VI A.

You will need to pay taxes on the incomes and gains from your investments. For example, your salary income is Rs 10 lakhs in a year, out of which Rs 7.5 lakhs becomes taxable after deducting exempt perquisites. Out of your income of Rs 10 lakhs, you invest Rs 3 lakhs in various options.

Even if none of your investments is eligible for tax saving under section 80C, your taxable income will remain Rs 7.5 lakhs. However, returns from some of these investments will become taxable in the next financial year when you receive them.

Since AY 2020-21 you have two ways to lower your income tax outflow on higher income – tax-saving investments and a new tax regime. You can stick to the old tax regime and invest your savings into eligible tax saving options. Tax-saving investments can give you a deduction of up to Rs 2 lakhs under sections 80C and 80CCD(1B), and additional deductions of up to Rs 2 lakhs under section 24.

Your deductions will be higher with other sections like 80E and 80G. But these are specific outflows which are not investments.

The best way to reduce your tax outflow legally is to use tax-saving investments and plan your future taxes carefully. Tax-saving investments will help you reduce your taxable income in the present financial year. If you invest in options which enjoy tax exemptions on maturity values, you can also reduce your future tax outflow. For example, Invest 4G ULIP from Canara HSBC Life Insurance allows you to stay invested up to the age of 99. This means that you can start investing at 30, build a corpus by 60 and have a tax-free lifetime pension.

Usually, a receipt is a convenient document to produce while claiming your deductions for expenses. However, the following alternatives are available if you lose the receipt:

a) Avail fuel or petrol expenses with number of kilometres
b) Credit card statement for computer items
c) Credit/debit card statement for stationery items
d) Membership documents to show running membership to claim the fees amount

You can claim HRA exemption with your employer and declare the amount in your ITR-1 form while filing your tax return. You will need to submit your house rent receipts with your employer to reduce your TDS. Use the online calculator to estimate your HRA exemption and claim the amount directly in your ITR.

If you are self-employed or do not receive HRA from your employer but have been paying rent for residence, you can claim a deduction of up to Rs 60,000 under section 80GG.

You can calculate your HRA exemption based on the following conditions. The amount of exempt HRA will be the lowest of the three:

a) HRA you have received
b) 50% of salary (basic + DA + Commission paid as % of turnover) if you are staying in a metro city otherwise 40%
c) Rent paid over 10% of your salary (as defined in step 2)

How to Save Income Tax?

6 Benefits of Filing Income Tax Return

Tax Savings - Top Selling Plans

We bring you a collection of popular Canara HSBC life insurance plans. Forget the dusty brochures and endless offline visits! Dive into the features of our top-selling online insurance plans and buy the one that meets your goals and requirements. You and your wallet will be thankful in the future as we brighten up your financial future with these plans.