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25 Oct 2020

What is HRA

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What is HRA?

House Rent Allowance or HRA is one of the major components of a basic salary, paid by an employer on the behalf of the company to their employees to reduce accommodation-related expenses of the same. With the cost of living rapidly increasing, especially in metropolitan cities, employees may find it very difficult to relocate to a different city for the purpose of employment, and HRA, which is an allowance paid towards the accommodation related expenses of employees, can help reduce their financial burden.

Is HRA exempt from Tax?

HRA, just like any other allowances provided by companies, are taxable to a certain extent. HRA is exempt from tax if it satisfies the least of any of the 3 criteria in-line with Section 10 (13A) of the Income-tax Act, 1961-
  • Actual HRA amount received from the employer.

  • 50% of the basic salary if the employee is residing in a metropolitan city and 40% in a non-metropolitan city.

  • Rent paid annually minus 10% of the basic salary.

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If Dearness Allowance (DA) forms part of the basic salary, then basic salary including DA needs to be considered as basic pay for the calculation of HRA.

For example, let us assume an employee resides in a rented flat in a metropolitan city, paying a monthly rent of Rs. 15,000, receiving a monthly basic salary of Rs. 30,000 and an HRA of Rs. 1 Lakh per annum.
In that case, the HRA amount that is exempt from tax during the Financial Year is the least of the following

Particulars Amount
Actual HRA Received-Rs. 1,00,000
50% of the salary-Rs. 1,80,000 (30,000 x 12 x 50%)
Rent Paid - 10% of the basic salaryRs. 1,44,000 [(15,000 x 12) - (10% x 3,60,000)]

The entire HRA amount of Rs. 1,00,000 is exempt from tax as it is the least of the above 3 criteria.

In order to claim HRA benefit, an employee needs to furnish all relevant rent receipts to their employer and in case the rent amount exceeds Rs. 1,00,00 per annum, the employee (tenant) is required to submit the PAN card copy of the landlord.

The employee can claim HRA Tax Benefit only if the person he does not own the property and HRA can be claimed as well as deduction on Home Loan interest if the individual has his own house but lives in a different city in a rented house.
Rent paid by self-employed individuals can also claim tax benefits under section 80GG.

HRA is exempt from tax in the case of self-employed individuals under Section 80GG in the case of least of the following-
  • Rs. 5000 per month

  • 25% of the total income*

  • Rent paid - 10% of the total income.

*Where total income is defined as the gross total income - long term capital gains and short term capital gains where Securities Transaction Tax (STT) is paid and where deductions are available under Sections 80C through 80U (except sec 80GG).

HRA Exemption calculator-

HRA exemption calculator can be found here

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.