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HRA Calculation – Everything You Need to Know

Salaried people who rent their homes can use the House Rent Allowance (HRA) to reduce their taxes — partly or entirely.

This reimbursement is for expenditures linked to rental housing. This allowance is totally taxed if you do not reside in rental housing.

How is the HRA Tax Exemption Calculated?

The amount that can be deducted is the lowest of the following :

  • For individuals residing in metro cities, actual HRA received 50% of [base wage + DA].
  • For people residing in non-metros, 40% of [base salary + DA]
  • The actual rent paid should not exceed 10% of the basic pay plus DA.

Is it possible to claim HRA as well as a deduction for home loan interest?

Yes, because the HRA has no influence on your home loan interest deduction, you may claim it. It is possible to claim both.

When is a Landlord's PAN Required?

Remember to supply the landlord's PAN if you have rented a residence on rent and are paying more than Rs 1 lakh per year. Otherwise, you risk losing the HRA exemption.

Landlords who do not have a PAN must sign a declaration according to Circular No. 8/2013 dated October 10, 2013. Tenants who pay rent to NRI landlords must remember to remove 30 percent TDS before making the payment.

What Happens If I Don't Get an HRA?

You can still claim the deduction under Section 80GG if you pay rent for a residential property but do not get an HRA from your employer. To be eligible for this deduction, you must meet the following criteria :

  • You're either self-employed or employed.
  • During the year for which you are claiming 80GG, you did not get HRA.
  • You, your spouse, your minor child, or the HUF of which you are a member – do not own any residential property where you now dwell, perform office or job obligations, or conduct business or profession.

You should not claim the advantage of self-occupied housing if you own any other residential property than the one specified above. To claim the 80GG deduction, the other property would be regarded to be rented out.

Let's try to understand this with the help of an example.

Mr Muhammad, who works in New Delhi, has rented an apartment and will pay Rs 15,000 per month for the Financial Year (FY)2020-21. He is paid a monthly base pay of Rs 25,000 and a DA of Rs 2,000, which is deducted from his salary. During the year, he also receives an HRA of Rs 1 lakh from his work.

Let's look at the HRA component that will be tax-free in fiscal years 2020-21. Calculate the following using the information provided :

  • HRA – Rs 1 lakh, or 50% of base pay, and DA – Rs 1,62,000 (50 percent *(Rs 25,000+Rs 2,000)*12 months).
  • Rs 1,47,600 (rent paid minus 10% of pay)

As a result, in the case above, the whole HRA received from the employer is tax-free.

When You Live with Your Parents, How Do You Claim HRA?

Let's look at an example to help you understand.

Tanisha works for a multinational corporation in Bangalore. Despite the fact that her employer pays her HRA, she stays with her parents in their home rather than in leased housing. How will she put this money to good use?

Tanisha can pay rent and receive the stipend. She must sign a leasing agreement with her parents and send money to them on a monthly basis. Tanisha will be able to offer a kind gesture to her parents while also saving money on taxes. Tanisha's parents must also include the rent she paid in their income tax forms. They can save tax on the family income if their other income is below the basic exemption level or taxable at a reduced tax bracket.

How Do I Claim a Section 80GG Deduction?

The deduction under this clause will be the least of the following :

Monthly rent of Rs 5,000; 25% of adjusted total income*; Actual rent should be less than 10% of adjusted total income*

Total income minus long-term capital gain, short-term capital gain under Section 111A, income under Section 115A or 115D, and deductions 80C to 80U equals adjusted total income (except deduction under Section 80GG).

Disclaimer :

*Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time’

The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale.
Make responsible financial decisions. Consult with your financial advisor before making any decisions on insurance purchase.

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