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HRA Component Of Your Salary Helps To Save On Taxes

By: Makemymoney

HRA – Your Tax Saver

Most people work for others as an employee in a job and get remuneration for their contribution to business activities. The remuneration of an employee is called salary. The employer pays salary to his employees.  An employee uses this salary to meet his financial needs and commitments like buying food, goods, paying children’s school fee, paying for different services and meet daily needs. They also use part of it for saving and investments to secure and plan for the future.

The salary paid to the employee is the sum total of different components.  These components are:

  • Basic Pay
  • HRA (House Rent Allowance)
  • DA (Dearness Allowance)
  • Employees provident fund (PPF)
  • Other allowances
  • Incentives

House Rent Allowance (HRA) is a significant part of one’s total salary. HRA is the amount received by an employee to meet the cost of residing in a particular city. It is paid by the employer so that his employees can pay their house rent.  HRA is calculated as a percentage of Basic Pay. None of the other components is taken into consideration while calculating HRA.

In metro cities, HRA is calculated as 50 percent of Basic pay and in other cities, it is 40 percent of basic pay. House rent is much costlier in metro cities as compared to other cities. To better understand this, we can use an example.

Suppose an employee named Ashish who is working for a private limited company and he is staying in Delhi. Following are the details of his salary which he gets every month.

  • Basic Pay – Rs.25,000  
  • DA – Rs.3,000
  • Other Allowances and Incentives – Rs 10,000                                                                      

His HRA will be 50% of his basic pay as he lives in Delhi which is a metro city, that is, 50% of 25,000 which is equal to Rs 12,500,

His total salary is the sum total of Basic Pay, HRA, DA, other Allowances and Incentives that

  • Basic Pay – 25,000
  • HRA (50% of Basic Pay) – 12,500
  • DA – 3,000
  • Other Allowances and Incentives – Rs.10,000

Monthly Total Salary of Ashish is equaled to 49,500.

NOTE – Only Basic Pay is considered while calculating HRA.

Everyone who earns an income needs to pay income tax as per the provisions of Income Tax Act, 1961, that is used by the government on infrastructure and social welfare schemes. Here we are going to see how House Rent Allowance (HRA) is treated under the Income Tax Act and how one can use exemptions. IT act has a provision regarding HRA which can help a person to reduce his tax liability. Total amount received as HRA is not fully taxable, a certain part of HRA is exempted from taxable income. This exemption is available under section 10 (13A) of Income Tax Act 1961. There are mainly 4 requirements for availing benefits on rent paid by a person against HRA amount received. These are:

  1. Only an employee can avail this exemption, the person who receives HRA and lives on rent can avail this exemption.  this is not for self-employed. A self-employed person is not eligible for this exemption.
  2. HRA should be a component of one’s salary, if HRA is not received, the person cannot avail exemption.
  3. The person should be staying on rent, rent should be paid by the person himself
  4. The amount of exemption can be claimed is the minimum of the following:

Actual rent paid 50% of basic pay if staying in a metro city, 40% of basic pay of staying in other cities. Excess of rent paid over 10% of basic pay

All these numbers are calculated on an annual basis.

Let us understand this with the above example of Ashish who is living in Delhi and assume he pays 8,000 rent monthly.

Now his annual basic pay= 250,000. Annual rent paid=  96,000

Exemption available to him is minimum of the following-

Annual rent paid  – 96,000

50% of basic pay   – 1,25,000

Excess of rent paid over10% of annual basic. (96000 – 25000) that is 76,000

So Ashish can avail Rs 76,000 as exemption from his taxable income. Rs 96,000 will be deducted from his taxable income to determine his tax liability. Tax to be paid by him will depend on the tax slab under which comes. It can be 5%, 20% or 30%.

One has to keep all the receipts of rent paid and the rent agreement with the house owner. If annual rent paid is more than Rs 1,00,000, It is mandatory to provide the PAN card number if landlord. All these are documentary proofs.

A person living with his parents can also avail exemption under IY act, provided he pays rent to his parents. He needs to transfer the money to his parents every month. He should keep all documentary evidence of rent paid.

Also Read – 5 Tax Benefits You Could Avail From Home Loans

One owns his own house but lives in a rented house can also avail this exemption. The exemption can be availed by him only if he is living in a rented house in the city in which he does the job. For any other, it is not available.

If the house in which the person lives is owned by his spouse, he is not allowed to avail the exemption as it is treated as a house belongs to both of them.

A self-employed person or a person who does not receive HRA as a component of salary and pays rents can also avail deduction section 80GG of Income Tax Act 1961. The condition to avail this exemption is that the person or his spouse should not own a house in the city where the person resides or his office is located.

Having knowledge of this provision can help the person to fill proper IT return and avail exemption.

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