Introduction
If you are a working professional or a salaried employee in India, chances are that you have heard of House Rent Allowance or HRA. It is a common component of most salary structures and is given to employees to help them meet the expenses of renting a house.
In this article, we will explain what HRA is, how it works, benefits, eligibility criteria, and tax implications.
The government has also provided tax benefits for HRA under Section 10(13A) of the Income Tax Act, 1961. If an employee receives HRA, they are eligible for tax benefits under this section. This section allows a deduction from the taxable income for the HRA amount received.
What is House Rent Allowance (HRA)?
House Rent Allowance (HRA) is a component of the salary given to employees to help them pay for their housing expenses. It is provided to employees who are either living in a rented house or are paying rent for a house they own but are not currently occupying.House Rent Allowance (HRA) is a component of the salary given to employees to help them pay for their housing expenses
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Benefits of House Rent Allowance
HRA provides financial assistance to employees who are living in rented accommodation. This allowance can help reduce the financial burden of paying rent, especially in metropolitan cities where the cost of living is high. HRA is also an essential component of an employee’s salary, and it can be used as a bargaining chip during salary negotiations.
To claim HRA benefits, the employee must be paying rent for the accommodation they reside in. If an employee lives in their own house or with their family, they are not eligible for HRA benefits. Also, if an employee lives in a house that is owned by their spouse, they are not eligible for HRA benefits.
Eligibility criteria for HRA
To be eligible for HRA, an employee must be living in rented accommodation and must not own a house in the city where they work. The employee must also be receiving a salary that includes HRA as a component. The amount of HRA that an employee is eligible for is calculated based on their salary, the city in which they live, and the actual rent paid.
The amount of HRA that an employee is eligible to receive depends on several factors, such as the city of residence, the employee’s basic salary, and the actual rent paid. In general, employees living in metropolitan cities such as Mumbai, Delhi, Chennai, Kolkata, and Bangalore are eligible for a higher percentage of HRA as the cost of living is higher in these cities.
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Factors Considered in the HRA Calculator
- Actual Rent Paid: This is the rent paid by the employee for the house they are currently occupying. It includes the basic rent and any additional charges such as maintenance charges, electricity charges, water charges, etc. However, it does not include charges for amenities such as a parking space or a swimming pool.
- HRA Received: This is the amount of HRA received by the employee from their employer. It is usually a fixed percentage of the employee’s basic salary.
- Basic Salary: This is the employee’s basic salary, which is used to calculate the HRA amount.
Calculation of HRA
HRA is calculated as a percentage of an employee’s basic salary. The percentage varies based on the city in which the employee lives. For example, employees living in metro cities like Delhi, Mumbai, Kolkata, and Chennai are eligible for a higher percentage of HRA than those living in non-metro cities. The actual HRA that an employee is eligible for is the minimum of the following three amounts.
- The actual rent paid minus 10% of the basic salary
- 50% of the basic salary if living in metro cities or 40% of the basic salary if living in non-metro cities
- The actual HRA received by the employee.
To claim HRA, the employee must provide proof of their rental expenses. This can be in the form of rent receipts, which should include the name and address of the landlord, the amount of rent paid, and the duration for which it was paid. If the rental agreement is for a period of more than 12 months, the employee must also provide a copy of the rental agreement.
Tax implications of HRA
HRA is a taxable allowance, but it can be partially or fully exempted from tax if certain conditions are met. The exemption is allowed under Section 10(13A) of the Income Tax Act, 1961. The exemption is the least of the following.
- The actual HRA received by the employee
- Actual rent paid minus 10% of basic salary
- 50% of the basic salary if living in metro cities or 40% of the basic salary if living in non-metro cities.
If an employee receives HRA but does not live in rented accommodation or if they live in a house that they own, the entire amount of HRA received will be taxable.
Let us understand this with an example
Suppose an employee’s basic salary is INR 50,000 per month, and they receive an HRA of INR 25,000 per month. They pay a monthly rent of INR 20,000. The employee resides in Delhi, which is a metro city.
In this case, the HRA tax exemption will be calculated as follows:
- 10% of basic salary = INR 5,000
- Actual rent paid – 10% of basic salary = INR 20,000 – INR 5,000 = INR 15,000
- 50% of basic salary = INR 25,000
The minimum of the above three amounts is INR 15,000, which means that the employee can claim an HRA exemption of up to INR 15,000 per month.
1. The actual rent paid minus 10% of the basic salary
2. 50% of the basic salary if living in metro cities or 40% of the basic salary if living in non-metro cities
3. The actual HRA received by the employee.
Yes, if your HRA is up to Rs 3,000 per month, you can claim HRA without rent receipts. But, you can not claim HRA without rent receipts when your HRA exceeds Rs 3,000.
To claim HRA, the employee must provide proof of their rental expenses. This can be in the form of rent receipts, which should include the name and address of the landlord, the amount of rent paid, and the duration for which it was paid. If the rental agreement is for a period of more than 12 months, the employee must also provide a copy of the rental agreement.