HRA Calculation

HRA Calculation: Overview

What is HRA (House Rent Allowance)?

House Rent Allowance (HRA), as the name suggests, is an amount paid by the employer to his employee as a part of the salary. The purpose of this allowance is to meet the cost of living in a rented accommodation. It also allows employees to get tax benefit on what they spend towards renting a house during the year. There are three conditions that entitle you claim HRA exemption-

  • You are a salaried individual; self-employed individuals cannot claim HRA
  • You stay in a rented accommodation
  • Your rent exceeds 10 percent of your salary
  • You get HRA as a part of your salary

In case you are paying an annual rent of more than Rs 1 Lakh, the landlord’s PAN will be required to claim HRA exemption. If the landlord does not have a PAN in his name, a signed declaration should be sufficient. But if none of these are available, you may lose out on the tax deduction.

The House Rent Allowance (HRA) differs from one city to another. For those working in privately owned organizations, HRA is 50% of the basic salary in metro cities and 40% of the basic salary in non-metro cities (subject to certain terms and conditions).

For the central government employees, the minimum and maximum HRA in different cities has been recently modified in July 2017 as per the recommendations of 7th Pay Commission. For this purpose, cities have been divided into three parts- X, Y and Z.

City Category Population HRA Calculation (as percentage of salary) Minimum HRA (in Rs)
X Above 50 lakh 30% Rs 5,400
Y 5 lakh to 50 lakh 20% Rs 3,600
Z Below 5 lakh 10% Rs 1,800

The above case is when the Dearness Allowance (DA) crosses 100 percent of the salary. In case it crosses 50 percent, the HRA percentage will be 27%, 18% and 9% for X, Y and Z cities, respectively.

Cities included in X Category- Delhi, Chennai, Bengaluru, Pune, Mumbai, Greater Mumbai, Kolkata, Hyderabad and Ahmedabad.

Cities included in Y Category- Jabalpur, Kolhapur, Vasai-Virar Cty, Malegaon, Vijaywada, Warangal, Greater Visakhapatnam, Guntur, Nellore, Raipur, Rajkot, Jamnagar, Bhavnagar, Vadodara, Surat, Faridabad, Gurgaon, Srinagar, Jammu, Durg-Bhilai Nagar, Mysore, Gulbarga, Kozhikode, Kochi, Thiruvanthapuram, Thrissur, Malappuram, Kannur, Kollam, Gwalior, Indore, Bhopal, Jamshedpur, Dhanbad, Ranchi, Bokaro Steel City, Belgaum, Hubli-Dharwad, Mangalore, Dehradun, Moradabad, Meerut, Ghaziabad, Aligarh, Agra, Bareilly, Lucknow, Kanpur, Allahabad, Guwahati, Patna, Chandigarh, Nanded-Waghala, Sangli, Cuttack, Bhubaneswar, Raurkela, Amritsar, Jalandhar, Ludhiana, Puducherry, Bikaner, Tiruchirappalli, Madurai, Erode, Gorakhpur, Varanasi, Saharanpur, Noida, Firozabad, Jhansi, Jaipur, Jodhpur, Kota, Ajmer, Salem, Tirupur, Coimbatore, Amravati, Nagpur, Aurangabad, Nashik, Asansol, Siliguri, Durgapur, Ujjain, Bhiwandi and Solapur.

Cities included in Z Category- Cities other than those mentioned above.

How is HRA Calculated?

For HRA Calculation, the term ‘salary’ refers to the sum of basic salary, dearness allowance and any other commissions received by the individual. For the purpose of HRA calculation for tax deduction, the actual amount of HRA exemption will be the lowest of these three-

  • Actual rent paid minus 10% of the basic salary
  • Actual HRA offered by the employer
  • 50% or 40% of the basic salary, according to the city in which the person resides

Let us consider the case of Sumit Arora, a salaried employee living in a rented accommodation in Delhi for which he pays Rs 12,000 per month. The table below shows his salary structure-

Salary Component Amount
Basic 23,000
HRA 15,000
Conveyance 3,000
Medical Allowance 1,250
Special Allowance 2,300
Total 44,550

Putting this in the formula given above, we find that-

  • Actual rent paid minus 10% of the basic salary = 12,000 – (10% of 23,000) = 9,700
  • Actual HRA offered by the employer = 15,000
  • 50% of the basic salary = 50% of 23,000 = 11,500

The least of the above three is the actual amount paid by Sumit as rent minus 10% of his basic salary. Hence, he will get an HRA exemption of Rs 9,700 from his taxable income.

Rules Regarding HRA Exemption

While the House Rent Allowance (HRA) is offered to almost all salaried individuals by their employers, there are a few cases in which tax exemption on HRA is not allowed. Listed below are the cases-

  • Since HRA is meant to provide for the cost of your rented accommodation, you cannot claim it when living in a self-owned house.
  • If you are staying with your parents and produce a rent receipt in the name of your parents, you can claim HRA exemption. However, your parents need to add the same rent into their income at the time of filing income tax returns.
  • You cannot pay rent to your spouse and claim HRA deduction on it.

Apart from these, you should note that the landlord’s PAN is required for HRA exemption in case the annual rent exceeds Rs 1,00,000. If the landlord does not possess a PAN, a signed declaration by them should be submitted.

HRA and Home Loan Tax Benefits

A number of people are confused whether they would be eligible to claim HRA deduction as well as deduction on home loan interest paid during the year. The regulations allow you to claim the two simultaneously. For example, you have taken a home loan for buying an under-construction property and paying interest towards the same. At the same time, you are living in a rented apartment. You are allowed to claim both the deductions in order to lower your taxable income.

More About Taxes

FAQs of HRA Calculation

1- How much of my HRA is exempt from tax?

The least of the following will be allowed as a deduction from your taxable income-

  • 50% of the basic salary if you live in a metro city
  • 40% of the basic salary if you live in a non-metro city
  • Actual rent paid is less than 10 percent of the basic salary
  • Actual amount of HRA paid by the employer

2- My landlord is an NRI. Can I still claim HRA?

If your landlord is an NRI, you should pay the rent after deducting 30% TDS.

3- What works as a proof of rent paid by me during the year?

You must keep the receipts of rent paid during the year. The same has to be produced at the time of filing Income Tax Returns (ITR). In case, rent receipt is not available, you will be required to file your lease agreement along with the bank statement that shows rent paid.

4- Can I claim HRA as well as deduction on home loan interest?

Yes, the Income Tax Rules allow both deductions simultaneously.

5- When is the PAN information of my landlord needed for HRA deduction?

You will have to provide the PAN details of your landlord if the total rent paid during the year exceeds Rs 1,00,000.

6- My house is owned by my spouse. Can I claim HRA by writing a rent receipt in his name?

Although it is not allowed in the Indian system as husband and wife are expected to live together. However, if you do write a rent receipt in your spouse’s name, he must declare it as an income at the time of filing ITR. This way it can be technically correct.

7- Is Dearness Allowance included when calculating HRA?

Yes. At the time of HRA calculation, DA is also taken into account.

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