What is HRA? Meaning and Calculation
Salaried individuals who live in rented accommodations or houses are eligible to claim HRA or House Rent allowance. Claiming the house rent allowance lowers your taxes either wholly or partially. This allowance is for all the expenses related to rental accommodations. HRA allowance is taxable and fully fledged if you live in a rented house.
In this article, we discuss ”what is HRA?”, its meaning, and the tax exemptions that you get through HRA.
The Meaning of HRA
HRA is known as house rent allowance in the tax code. It is paid to an employee by the employer. It essentially means that the salary or income component received to pay rent is deductible from taxable income under Section 10(13A) of the Income Tax Act.
Also, you must know that HRA can be claimed when you’re self-employed or salaried. An employer gives the employee this HRA as an allowance for rented accommodation. Moreover, you can use this exemption even when you work for yourself or when the company does provide you with a house rent allowance.
Do you know what the best part about HRA is? The best part is that it is exempted from taxes when you live in rented accommodation. Individuals living on their own who receive HRA from their employer are not eligible for the tax benefits provided by the HRA exemption section.
Furthermore, HRA is determined in two ways:
The HRA is 50% of your primary income when living in a metropolitan city. In any other city, the HRA is supposed to be 40% of your basic salary.
If there is DA (dearness allowance) or commissions, the HRA is equivalent to 40-50% of the basic salary.
How is HRA Calculated?
The House Rent Allowance is the portion of a taxpayer’s wage that reduces the tax liability of an individual living in rented housing. Using an online HRA calculator for your salary can help you determine the HRA rebate you would get while filing your income tax return.
Note: The history of income tax in India dates back to 1860 when it was introduced by Sir James Wilson. It was done to meet losses during the 1857 Sepoy Mutiny.
You can even calculate it manually, but it can be a bit taxing for you. Therefore, using an online calculator makes it easier to calculate. Here are the steps to calculate HRA:
Actual HRA received by employees from their employers.
HRA is 50% of the sum of basic salary and DA for metro city employees. It is 40% of the sum of their basic salary and DA for non-metro city employees.
Actual rent minus 10% of (basic salary + DA).
Things to Keep in Mind When Making HRA Deductions
There are a few things to remember regarding HRA exemptions, such as:
You cannot claim a house rent allowance if you are paying rent to your partner/spouse
HRA exemption can be availed even when applying for a home loan
Even when you stay with your parents, HRA can be claimed by paying them rent and getting a receipt.
Also, you must submit the PAN details of the landlord/lady if your income exceeds Rs.1 lakh annually.
In the case of an NRI landlord, TDS(tax deducted at source) of 30% is deducted before paying the rent.
If the employee’s home is rented to someone else, the employee can claim a house rent allowance. They can claim the benefits of tax exemptions of HRA on both the rent paid and the home loan (if taken any). In such cases, they need to denote the income earned through the property for which the home loan was taken and thus pay the due tax.
You should remember that the house rent allowance is only available to Hindu Undivided Families (HUF). Also, salaried, and self-employed individuals can claim deductions related to rent in case they do not receive tax exemptions under Section 10. Also, keep in mind the last date for filing the ITR is July 31 in any given financial year, and this date must not be missed whatsoever.