How to Calculate House Rent Allowance Exemption?
Calculating the House Rent Allowance Exemption is a very tricky job. As you know, the tax exemption of house rent allowance is an incentive that can definitely be of help to any employee living in a rented property. Unfortunately, getting this calculation right has become tough these days as the calculation formula is fairly unknown. With the internet age, HRA calculators make it easy to know the precise amount of exemption.
Today, this article will go over the HRA exemption calculation formula and a few examples of how you can do it quickly.
What exactly is a house rent allowance exemption?
The basic concept behind the introduction of house rent allowance is the fact that the employer needs to compensate for the cost of living of an employee working for the organisation. The tax exemption for this is given under section 10(13A) of the Income Tax Act, 1961. According to the conditions, the HRA can be fully or partially taxable. The exemption amount is dependent on various factors, namely the place of residence, the actual rent paid, and HRA received.
The HRA exemption is allowed to either salaried or self-employed individuals. The exemption can be availed of only if the person is actually paying rent. So, if your salary has an HRA component, but you are not paying rent, then the entire amount is taxable in your hands as an employee.
If you are a self-employed or a salaried person who does not receive HRA from the employer, you can still avail of the benefit under Section 80GG of the Income Tax Act, 1961. In this case, the employee can claim the least in lieu of the rent they pay.
- Rs. 5,000 per month or Rs. 60,000 per annum
- 25% of gross total income
- Actual rent paid (-) 10% of gross total income.
How to calculate house rent allowance exemption?
The calculation of house rent allowance is quite simple. HRA calculators help to compute the actual amount for the user and make the process very convenient.
The allowance amount that is received is the lowest of the following:
- Rent paid (less) 10% of the salary
- The amount of HRA that is actually received from the employer
- 40% of salary or 50% of salary in the case of Delhi, Mumbai, Chennai, and Kolkata.
For the purpose of HRA, calculators will assume salary as
Salary (plus) the dearness allowance and the commission received in addition if given as a fixed percentage of turnover by the employee.
Examples:
Let us understand in detail how the calculation works. Mugdha is a sales professional who lives in Nagpur and pays a rent of Rs. 9,000 per month.
The salary received by her from the employer is as follows:
Basic salary – Rs. 15,000 per month
Dearness allowance – Rs. 5,000 per month
HRA received – Rs. 9,000 per month
In addition to this, a monthly commission of 2% on an average turnover of Rs. 3,00,000 is paid. The amount comes to Rs. 6,000.
The total salary calculation will be – Rs. 15,000 + Rs. 5000 + Rs. 6000 = Rs. 26,000.
The HRA exemption will be the least of the following.
- Rent paid (-) 10% of salary = Rs. 9000 (-) Rs. 2600 = Rs. 6,400
- 40% of salary (since the place is Nagpur) = Rs. 26,000 x 40% = Rs. 10,400.
- Actual HRA received = Rs. 9,000.
The exemption provided in this case will be Rs. 6,400.
If we consider the same example, but there is no commission received by Mugdha, then the calculation will be as follows.
Total salary = Basic salary + dearness allowance = Rs. 15,000 + Rs. 5,000 = Rs. 20,000
- Rent paid (-) 10% of salary = Rs. 9000 (-) Rs. 2000 = Rs. 7,000
- 40% of salary = Rs. 20,000 x 40% = Rs. 8,000
- Actual HRA received = Rs. 9,000
The HRA exemption received in this case will be Rs. 7,000.
After going through the above examples, we can conclude that the calculation requires you to know the total salary, actual rent paid, HRA received and the place of residence. These factors have an effect on the exemption received.
The bottom line
While this article only covers the basics, it serves as a good starting point to help you calculate the exemption on your own. You can get all the details here or have a financial consultant do it for you. With the advent of technology, it has become easier to get a precise amount by entering just the basic information. But, to understand the exemption, detailed work should be known. Also, remember that such calculating help is available online for free with HRA calculators, so keep that in mind for your next tax filing. In any case, we hope that this article helps you with your HRA exemption calculation.