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Basics of House Rent Allowance That You Must Know

Look at your salary slip - are you getting a House Rent Allowance (HRA) and do you know how it works? Do you understand that even small changes can affect the eligibility of your HRA? Here we demystify the rules surrounding HRA so you can best avail of this exemption in a tax efficient manner.

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What does HRA mean? How is it calculated?

HRA is an allowance given by an employer to an employee towards the rental accommodation expenses of the employee. The employee must not own this property.

The calculation of HRA is quite simple. As an employee, you need to submit the rent receipts to your employer showing the amount of actual rent paid. The amount of the allowance is the lowest of the following 3 limits:

1. Rent paid less 10% of Salary
2. 40% of Salary (or 50% if rented premises is in Delhi/Mumbai/Chennai/Kolkata)
3. Actual HRA received from the employer

How is salary defined for HRA - is it salary paid or taxable salary?

Actually, its none of the above. For the purpose of HRA calculations, salary is defined as:

• Basic salary
• Dearness Allowance, if provided
• Commissions earned, if given as a fixed percentage of turnover achieved by employee

Show me an illustrative example

Rajan, an advertising salesman for a media company, lives in a rented accommodation in Delhi on a rent of Rs 10,000 per month. He receives the following as his salary:

• Basic salary: Rs 12,000
• Dearness Allowance: Rs 4,000
• HRA: Rs 8,000

In addition, Rajan also received a monthly commission of 3% on average monthly turnover of Rs 3 lakhs achieved by him. This amounts to Rs 9,000 per month.

Rajan's salary for the purpose of HRA exemption will be:

• Basic salary: Rs 12,000
• Dearness Allowance: Rs 4,000
• Commissions earned: Rs 9,000
• Total salary: Rs 25,000

The HRA exemption will be the lowest of the following:

1. Rent paid less 10% of Salary = Rs 10,000 less Rs 2,500 = Rs 7,500
2. 40% of Salary (or 50% if rented premises is in Delhi/Mumbai/Chennai/Kolkata): Since apartment is in Delhi the 50% limit applies = Rs 12,500
3. Actual HRA received from the employer = Rs 8,000

The lowest of the above three amounts is Rs 7,500. This amount is exempt. The taxable amount is HRA received (Rs 8,000) less HRA exempt (Rs 7,500) = Rs 500.

What factors is HRA exemption sensitive to?

HRA exemption is based on 4 elements:

1. Rent paid
2. Location of the premises
3. Salary received, including commissions earned
4. Actual HRA received

If any of the above items changes, then the HRA computation also changes. Therefore, it is advisable to calculate the HRA exemption separately for each period during which there is a change in any of the above factors.

I stay in a property owned by my parents/spouse. Can I still claim HRA?

To claim HRA, you must be offered HRA as a part of your salary, and you must be paying rent for a property that does not belong to you.

If you live in a property owned by your parents/spouse, and you pay rent to them, then you can claim HRA.

However, you must remember that this rental income to paid to them needs to be shown as income on their tax return to avoid any tax issue they might face.

I own a house on which I get a tax benefit on my home loan. Can I still claim HRA?

As long as you meet the criteria for both a home loan deduction and HRA exemption, you can get both tax benefits.

Home loan related tax benefits are available towards repayment of principal and payment of the interest on your home loan. If you happen to live in a house that is not owned by you, but you pay rent for it, then if you are being offered HRA as a part of your salary, you can claim the HRA exemption. You might be living in rented accommodation in an area because of employment related purposes, which is far away from your owned property or in a different city altogether.

For instance, Rajan owns a home in North Delhi which has a home loan outstanding. He lives in South Delhi, but in a rented accommodation so that he is close to work. If Rajan's employer offers him HRA benefits as a part of his salary, then he can get the HRA exemption. He can also claim the home loan related tax deductions for his owned home.

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