House Rent Allowance, or commonly known as HRA, is an amount which is paid by employers to employees as a part of their salaries. This is basically done as it helps provide employees with tax benefits towards the payment for accommodations every year. The decision of how much HRA needs to be paid to the employee is made by the employer on the basis of a number of different criteria such as the salary and the city of residence.
Regulated by the provisions of Section 10(13A) of the IT Act, the house rent allowance serves to be quite beneficial to salaried employees in India.
As per law, only salaried employees can claim HRA and self-employed individuals are exempt from doing the same. HRA, as an exemption is provided, only if the employee is living in rented accommodations. However, also in case the employee lives in his or her own house and does not pay any rent, he or she cannot claim HRA to save on taxes.
Factors affecting House Rent Allowance
Primarily, HRA is decided based on the salary. However, there are some other factors that also affect HRA, such as the city in which the employee resides. In case the individual resides in a metro city, then he/she is entitled to an HRA equal to 50% of the salary. For cities other than a metro, the entitlement is 40% of the salary. In order to calculate the HRA, the salary is defined as the sum of the basic salary, dearness allowances and any other commissions. If an employee does not receive a commission or a dearness allowance, then the HRA will be around 40% – 50% of his/her basic salary.
The actual HRA offered, in all probability, will be the lowest of the following three provisions:
The actual rent that is paid should be less than 10% of the basic salary.
In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a a non-metro city.
The actual amount received as the HRA from the employer.
Calculation of House Rent Allowance
HRA or The House Rent Allowance serves as a crucial component of an individual’s salary. It defines the total amount allotted by the employer towards the employee’s accommodation as rent. The amount allotted for HRA proves to be beneficial for an employee as it is calculated for tax deductions for a particular financial year. HRA also helps in reducing the taxable income that you are liable to pay. The tax benefits associated with HRA are only applicable for those salaried individuals who stay in a rental accommodation. If an employee stays in his or her own house, he or she is not eligible to claim the amount for tax deductions.
Calculation of HRA is based on a number of factors, such as the entitlement to 50% of the basic salary, if the employee is residing in a metro city and 40% in case he/she stays in any of the other cities. The calculation of HRA for tax benefit is considered from any of the following three listed provisions:
- The actual rent that is paid should be less than 10% of the basic salary.
- In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a a non-metro city.
- The actual amount allotted by the employer as the HRA.
The least of the aforementioned amount will be considered for tax deduction from HRA.
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