How to Calculate HRA Tax Exemption Online with Example

HRA (House Rent Allowance) is a component of the salary offered by employers to employees to help them pay for their accommodation expenses. It is provided to individuals living in a rented house or paying rent for the accommodation they are currently residing in.

HRA is calculated as a percentage of the basic salary and can be partially or completely exempted from taxes, subject to certain conditions. HRA in salary aims to help employees manage their accommodation expenses and ensure a decent standard of living.

HRA (House Rent Allowance) tax exemption is a provision that allows employees to claim exemption from taxes on the part of the HRA received from their employer. The amount of HRA exempt from taxes is calculated based on the actual rent paid by the employee for the accommodation they reside in, the HRA received from the employer, and the city of residence.

The exemption is provided under Section 10(13A) of the Income Tax Act, 1961, and is subject to certain conditions. HRA tax exemption can help reduce an employee's tax liability and ensure that they only pay taxes on their HRA component of the salary.

Under the new tax regime introduced in Budget 2020, taxpayers can choose between the old and new tax regimes. No tax deductions or exemptions are available in the new tax regime, including the HRA tax exemption. This means taxpayers cannot claim tax exemption on the HRA received from their employer, even if they pay rent for their accommodation.

However, the government has increased the standard deduction for salaried employees from ₹50,000 to ₹75,000 in the new tax regime. Employees can claim this standard deduction regardless of whether they pay rent. This standard deduction is meant to compensate for the loss of tax benefits available under the old tax regime, including the HRA tax exemption.

Simply put, under the new tax regime, the HRA component of the salary will be taxed as per the income tax slab rate applicable to the employee without any tax exemption available. However, the increased standard deduction can help reduce the overall tax liability of the employee.

Let us explain this with an example of how HRA is calculated!

Meet Sumit, who works for a company that provides him with a monthly salary of ₹50,000. Sumit also receives an HRA of ₹15,000 per month. He lives in Kolkata and pays a rent of ₹12,000 per month.

To calculate the HRA tax exemption, Sumit needs to follow these steps

Step 1- Calculate the least of the following three amounts

Actual HRA received = ₹15,000 per month

50% of basic salary = ₹25,000 per month (assuming basic salary is ₹50,000)

Actual rent paid minus 10% of basic salary = ₹7,000 per month (assuming 10% of basic salary is ₹5,000)

So, the least of these three amounts is ₹7,000 per month.

Step 2- Calculate the amount of HRA that is exempt from taxes

HRA received - least of the above three amounts = ₹15,000 - ₹7,000 = ₹8,000 per month

Therefore, ₹8,000 per month of Sumit’s HRA is exempt from taxes. The remaining ₹7,000 per month is taxable.

So, Sumit will be able to claim a tax exemption of ₹8,000 per month on his HRA received, and the remaining ₹7,000 per month will be added to his taxable income and taxed as per the income tax slab rate applicable to him.

Now, here are a few things that you should keep in mind while making this calculation

Your HRA is largely determined by the various compensation elements, including your basic income, Dearness allowance (DA), and any special allowances you may receive.

Your HRA may vary depending on the city you reside in. The HRA should be at most 50% of your basic pay if you live in a metro city and 40% of your basic salary if you live in a non-metro city.

You cannot make an HRA claim if you stay in a hotel. You will need a rental agreement, bank statements, and rent receipts to demonstrate that you are paying rent.

The tax benefits of HRA (House Rent Allowance) are as follows

Tax exemption on the part of HRA received- Under Section 10(13A) of the Income Tax Act, 1961, a part of the HRA received by an employee can be claimed as tax-exempt. The exemption amount depends on the actual rent paid by the employee, HRA received, and the city of residence.

Reduced tax liability- Claiming tax exemption on HRA can help reduce an employee's tax liability. The exemption amount is deducted from the taxable income, which in turn reduces the tax liability.

Increased take-home salary- By claiming tax exemption on HRA, employees can increase their take-home salary, as a part of their salary that would have been deducted as taxes can now be retained.

To claim a tax deduction on HRA (House Rent Allowance), an employee needs to meet the following eligibility criteria:

HRA should be a part of the salary The employee should receive HRA as a component of their salary.

Paying rent The employee should pay rent for the accommodation they currently reside in. HRA tax exemption cannot be claimed if the employee owns the accommodation or lives in a house provided by the employer.

Actual rent paid The employee needs to provide proof of the actual rent paid for the accommodation. If the rent paid is lower than the HRA received, the exemption will be calculated based on the lower of the two amounts.

Place of residence The tax exemption on HRA varies based on the city of residence of the employee. The classification is based on four categories - metropolitan, non-metropolitan, Delhi, and Mumbai. The tax exemption is calculated based on a percentage of the HRA received.

It is important to note that the employee needs to meet all the above-mentioned criteria to claim a tax deduction on HRA. Any failure to meet these conditions can result in the entire HRA amount being taxable.

To claim tax exemption on HRA (House Rent Allowance), an employee needs to provide the following documents:

Rent Receipts The employee needs to submit rent receipts for the rent paid during the financial year. The rent receipt should include the landlord's name, the address of the rented property, the amount of rent paid, and the duration for which the rent is paid.

Rent Agreement If the rent paid during the financial year exceeds ₹1 lakh, the employee needs to submit a rent agreement as proof of the tenancy. The agreement should include the terms and conditions of the tenancy, the rent amount, the duration of the tenancy, and the details of the landlord and tenant.

Salary Slips The employee needs to provide salary slips or a salary certificate as proof of the HRA received. The salary slip should include the amount of HRA received and the period it is received.

PAN of the Landlord If the annual rent exceeds ₹1 lakh, the employee needs to provide the landlord's PAN (Permanent Account Number).

Other documents If the employee lives in a furnished accommodation, they can submit bills for purchasing furniture or appliances as proof of the rent paid.

We must also tell you that if you have recently got a job, you must also think about buying a robust health insurance policy. With the right health insurance plan in place, you will not have to worry about paying hefty medical bills.

Like HRA tax exemptions, you can also get health insurance tax benefits under Section 80D of the Income Tax Act. Also, with a Tata AIG medical insurance policy, you can get several benefits like, cashless hospitalisation, swift claim process, and so on.