House Rent Allowance (HRA) is a component of the salary provided by an employer to his employee for paying the rent of his rented accommodation. HRA exemption for income tax purpose can be claimed only if the employee is residing in a rented house. Under Section 10 of the Income Tax Act, the exemption from tax can be claimed partially or fully. HRA is a useful allocation of your salary component to save tax.
In order to claim HRA exemption, the following four conditions need to be fulfilled by you:
- Being a salaried employee
- Living in a rented accommodation
- Rent is more than 10% of your salary
- HRA is a part of your salary
The significant factors taken into consideration for HRA are:
- Your salary
- The HRA you receive
- The rent that you pay
- Location of residence
The place of residence is a crucial factor for determining the HRA. Because you can be residing in a metro or a non-metro city. Subjected to the population of the city of residence, the HRA will vary.
For a private organization set up, HRA generally contributes to 50% of the basic salary of employees residing in metropolitan cities and 40% of the salary in other non-metro towns. For central government employees, the rules are different for HRA.
In case if you are paying a home loan and are availing tax benefits on it, you can still avail the benefit of HRA if you are getting an HRA allowance as a part of your salary from your employer. Claiming this exemption is possible when you have rented out your property to someone else and continue to stay in rented accommodation yourself. Though, in such cases, you will need to account for rental income you receive under the head of “income from other sources”.
We are now coming to the calculation of HRA.
While calculating the HRA, three values are of primary importance:
- The rent allowance that your employer decides provides you as a part of your gross monthly salary.
- The actual monthly rent that you pay – 10 per cent of your basic salary.
- 50 per cent of the basic salary (if you are a metro city resident) 40 per cent of the basic salary (if you are a non-metro city resident)
The least of the above three values will be allowed as tax exemption as your HRA exemption. In order to get the maximum HRA benefits, you can use even as your employer to restructure your pay structure.