How to Calculate HRA Tax Exemption

Unlocking the potential of tax-saving strategies is pivotal for sound financial planning. Among these strategies lies the House Rent Allowance (HRA) tax exemption, a vital aspect for salaried individuals who rent accommodation. Understanding the mechanics of how to calculate HRA tax exemption can translate into significant savings. Let’s delve into the details and understand the determinants of HRA so that you have clarity regarding the same.

What is HRA (house rent allowance)?

HRA is an employer-provided allowance to employees to meet housing rental expenses. It forms a part of the salary structure and offers tax benefits under the Income Tax Act when the employee resides in rented accommodation.

Is HRA taxable?

HRA is taxable if an employee does not live in rented accommodation or fails to provide necessary rent receipts. However, if the employee pays rent and complies with documentation requirements, a portion or the entire HRA can be exempted from tax, as calculated above.

HRA for self-employed individuals

Self-employed individuals do not receive a salary; hence, they are not eligible for HRA. However, they can claim a deduction for rent paid under Section 80GG of the Income Tax Act, subject to certain conditions.

HRA for salaried individuals

Salaried individuals receiving HRA as part of their salary can claim tax exemption on it, provided they live in rented accommodation and furnish valid rent receipts. The exemption is calculated based on the criteria mentioned earlier.

How to claim HRA exemption?

To claim HRA exemption:

1. Submit Rent Receipts: Provide your employer with rent receipts or a rental agreement as proof of rent paid.
2. PAN of Landlord: If the annual rent exceeds ₹1,00,000, furnish the landlord's PAN to your employer.
3. Declaration: Some employers may require a declaration form detailing the rent paid and the landlord's details.

How to calculate HRA exemption?

The tax deduction for HRA is determined by the following:

1. Actual rent paid minus 10% of the basic salary

1. Actual HRA provided by the employer

1. 50% of the salary if the residential house is in Mumbai, Delhi, Chennai or Kolkata; 40% of the salary if the residential house is elsewhere.

Please note that for HRA calculation purposes, ‘salary’ encompasses the sum of basic salary, dearness allowance (DA), and other applicable commissions.

These three scenarios delineate how HRA tax exemption is computed. Understanding these scenarios is crucial for optimising your tax advantages. Let’s delve deeper into each scenario to gain a clearer understanding.

• Actual Rent Paid Minus 10% of Basic Salary: This calculation considers the actual rent paid by the employee minus 10% of their basic salary. For instance, if the rent paid is Rs 12,000 and 10% of the basic salary is Rs 2,300, the exemption would be Rs 9,700.
• Actual HRA Offered by Employer: This is straightforward — it’s the HRA amount provided by the employer. Here, the HRA offered is Rs 15,000. However, this may vary depending on the individual’s employment terms.
• 50% of Basic Salary: Half of the basic salary is another benchmark for calculating HRA exemption. This ensures a balanced approach, especially for individuals with high rents relative to their salary.

Do note that the minimum of the above three computations will be the actual amount paid as rent minus 10% of one’s basic salary.

Also, you must remember the following:

• If you pay an annual rent that exceeds Rs 1 lakh, you will require your landlord’s PAN Number to claim HRA exemption. If you are unable to provide the landlord’s PAN Number, you can submit a signed declaration from him/her.
• You cannot claim an HRA deduction for rent paid to your spouse.
• Rent paid to your parents makes you eligible for HRA exemption, but your parents will need to declare it in their ITR.

HRA calculator

Several online tools can assist in calculating your HRA exemption:

• ClearTax HRA Calculator: A user-friendly tool to compute your HRA exemption.
• ICICI Prudential HRA Calculator: Offers detailed insights into your HRA exemption.

How to claim HRA when living with parents?

If you reside in a property owned by your parents, you can pay them rent and claim HRA exemption, provided:

• Rental Agreement: Draft a rental agreement between you and your parents.
• Rent Payment: Transfer rent to your parents' bank account regularly.
• Parents' Income Declaration: Your parents must declare this rental income in their tax returns.

This strategy can be tax-efficient if your parents are in a lower tax bracket or have no taxable income.

How to claim deduction under section 80GG?

Section 80GG allows individuals not receiving HRA to claim a deduction for rent paid, subject to the following:

• Eligibility: Applicable to self-employed or salaried individuals not receiving HRA.
• Deduction Limit: The least of the following:
  • ₹5,000 per month
  • 25% of total income (excluding capital gains)
  • Actual rent paid minus 10% of total income

To claim this deduction, file Form 10BA confirming that you do not own any residential property.

Can I claim HRA and deduction on home loan interest?

You can claim both HRA and home loan interest deductions if:

• Different Locations: The rented and owned properties are in other cities.
• Same City: If both properties are in the same city, provide valid reasons (e.g., distance from the workplace) for not residing in the owned property.

Conclusion

Mastering how HRA tax exemption is calculated is essential for optimising tax savings and maximising take-home pay. Similarly, you can avail yourself of a tax rebate for an individual health insurance plan or health insurance policy for family premium payments under Section 80D of the Income Tax Act. By understanding the various factors involved, individuals can make informed decisions regarding tax planning. By leveraging both HRA tax exemption and health insurance benefits, individuals can build a robust financial foundation and save a significant amount of their taxable income.

Disclaimer: The information provided in this blog is for educational and informational purposes only. It is not intended as a substitute for professional advice, diagnosis, or treatment. Please consult your general physician or another certified medical professional for any questions regarding a medical condition. Relying on any information provided in this blog is solely at your own risk, and ICICI Lombard is not responsible for any effects or consequences resulting from the use of the information shared.