Financial responsibility means understanding your financial obligations and navigating through them effectively. It’s important to be aware of your tax implications, potential deductions, and available benefits so you can start planning your finances judiciously.

As a salaried employee renting a house or an apartment, you have the opportunity to avail a tax benefit from House Rent Allowance (HRA) provided by your employer. However, the percentage of exemption varies depending on the city you reside in. Claiming your HRA is a straightforward process—simply provide your PAN card, rent agreement details, landlord PAN card details and rent receipts.

There are a lot of angles that need to be understood when exploring HRA, and here is the best place to learn everything you need to understand about HRA exemptions, calculating HRA, so you can plan and execute your finances sustainably and efficiently.

HRA Meaning & Definition

House Rent Allowance (HRA) is a component of an employee’s salary provided by an employer to cover the house rent expenses incurred by the employee. It is a common element in salary structures and is designed to help employees meet the cost of housing, especially if they live in rented premises. 

What is an HRA Calculator?

An HRA calculator is a tool to help employees calculate the House Rent Allowance (HRA) exemption that they are eligible for. HRA  is exempt from income tax when you fulfil all the criteria and this allowance is provided by employers to help offset the cost of renting your house or apartment. 

Employees can claim a deduction for HRA from their taxable income under Section 10(13A) of the Income Tax Act, 1961. This act was put into place to ease the financial burden of individuals who incur expenses on rented accommodation. 

• Metropolitan cities: In metropolitan cities this amount can go up to 50% of the salary.
• Non-metro areas:  In non metropolitan areas, an employee is eligible for 40% of their income. 

Benefits of Calculating HRA Exemption:

• Tax Benefits: HRA helps you save on income tax, and this exempted amount is calculated using factors like your salary, rent paid, and the city you live in.

• Financial Flexibility: Understanding how HRA is calculated helps you optimise your salary structure. This in turn helps you manage your finances in a flexible manner.

Employee Benefits of using an HRA Calculator 

There are several benefits of using an HRA calculator:

• Save time and effort while calculating their HRA exemption.
• Avoid errors in calculation.
• Plan their tax deductions more effectively.
• Negotiate a better salary package with their employer.
• Budget monthly expenses more accurately.

Understanding HRA calculation

HRA, or House Rent Allowance, is a component of your salary that helps you manage your rental expenses. It is primarily intended to provide financial aid to employees who live on rent. The beauty of HRA lies in its tax-saving potential, making it an integral part of your overall compensation.

The HRA exemption that you are eligible for is calculated based on the following factors:

• Your salary
• The HRA component of your salary
• The rent that you pay 
• The city in which you live

HRA for Self-Employed Individuals

Individuals who are self-employed can also avail of deductions under Section 80 GG. 

HRA for Salaried Individuals 

Salaried individuals can claim tax benefits on HRA under certain conditions. The amount of exemption is determined based on the actual HRA received, the rent paid, and other factors. Employees need to provide rent receipts and other relevant documents to avail of this tax benefit.

Documents Needed to Claim the HRA Exemption

These documents need to be provided when claiming HRA Exemption:

• Rent Receipts: A copy of the entire years rent receipts need to be submitted.
• Rent Agreement: A complete copy of the legal rent agreement is mandatory.
• Landlords PAN details: This information will be provided by your landlord.
• Form 10BA: This form needs to be submitted if the tenant’s salary is more than 1lakh.
• Rent Agreement Stamp: Sometimes when the rent agreement needs to be stamped, a copy of the same needs to be provided.
• Tenant Name

How is tax exemption on HRA calculated?

HRA Exemption = min (HRA Received12) , (min (Rent paid – 0.1 x Basic Salary, 0.5 x Basic Salary)

The Components breakdown is:

* HRA Received12 = Actual Monthly HRA received

* Actual rent paid (0.1 x Basic Salary) = 10% of basic salary

* 0.5 x Basic Salary = 50% of basic salary (for metro cities) or 40% of basic salary (for non-metro cities)

***This formula is valid for salaried employees in India who are living in rented accommodation. Self-employed individuals can also claim a deduction for HRA under Section 80GG of the Income Tax Act, 1961, but the maximum deduction is limited to Rs. 5,000 per month or 25% of total income, whichever is lower.

The formula considers three values and takes the minimum of the following:

• Monthly HRA received.
• Rent paid minus 10% of the basic salary.
• 50% of the basic salary.

This example will help you understand the formula better: 

Suppose Arun receives an HRA of Rs. 15,000 per month, the basic salary is Rs. 40,000, and the rent paid is Rs. 18,000.

HRA Exemption = 

min {(15,00012),[min (18,000 – 0.1 x 40,000; 0.5 x 40,000)]}

HRA Exemption = min {1,250, [min (18,000 – 4,000; 20,000)]}

HRA Exemption = min {1,250, [min (14,000 ; 20,000)]}

HRA Exemption = min (1,250;14,000)

HRA Exemption = 1,250 

The HRA exemption would be Rs. 1,250 per month. This exempt sum is not added to Arun’s taxable income, leading to him saving on income tax.

What if I don’t receive HRA?

Even if you don’t receive HRA from your employer you can claim a deduction under Section 80GG. You can be eligible for claiming a deduction if you:

• You are self employed or salaried
• Do not receive HRA at any time during the financial year for which the deduction is being claimed.
• The taxpayer, their spouse, or minor child should not own any residential accommodation in the city where they are employed or carry on their business or profession. Ownership of residential property anywhere else is not relevant for this provision.

If you do not live on a rental property, you can assign your parents or as your landlord and claim the deduction as per the guidelines. 

FAQ’s

What if I forget to submit my rent receipts to my company?

• You are going to be fine. HRA is one thing that you can claim at any time. So even if you forget to submit your rent receipts to your employer, you can always file it later with your Income Tax Returns. You can even claim any excess deductions at that time.

Can I avail this even if my landlord is not giving me his PAN card details?

• To claim HRA returns, you will need to submit your landlord’s PAN card number and there is no way around it. You can find his details on your rental agreement because their PAN card details are mandatory when registering a tenant.

Can I get a tax exemption and a tax rebate on my Home Loan?

• Of course, you are eligible to claim House Rent Allowance (HRA) even if you are renting a house for yourself, despite owning another home for which you are repaying a home loan through EMIs. However, it is important you provide documents that prove that the property you have purchased on home loan is located far away from your workplace.

How frequently can I claim HRA tax exemption?

• You can claim HRA on a regular basis, but just make sure that you have all the documents at your disposal, and that you are following the proper guidelines when applying for HRA.

Can I avoid monthly tax deduction by declaring HRA in advance?

• HRA is a deduction that is done on a monthly basis. The deductions you claim in advance only serve as an estimate and the amount actually provided by your employer on a monthly basis is the amount that is considered, and the actual calculations are based on the actual expenses incurred during the year. If you have specific concerns or questions about your tax planning, it’s advisable to consult with a tax professional.

How much percentage of my basic salary is calculated for HRA?

• Depending on the place you are renting your accommodation, your HRA can be anywhere between 40% (non-metro areas) and 50% (metropolitan areas). 

How to claim HRA if you live with your parents?

• To claim HRA, you must actually pay rent for the accommodation where you live, even if it’s with your parents. The arrangement should be genuine, and there should be a landlord-tenant relationship.

Can I Claim Deduction Under Section 80GG?

To claim deduction under Section 80GG you must not receive HRA and not own any rental residence in the place you are residing in. The following amounts are taken into account and the least of them is used to calculate your deduction:

• Rent paid minus 10% of total income.
• Rs. 5,000 per month.
• 25% of the total income.

What is an HRA certificate?

• An HRA (House Rent Allowance) certificate is a document provided by an employer to an employee so they can claim income tax benefits on the HRA component of their salary. 

How much HRA can be claimed without proper documents?

• Without proper proof, the claim for HRA will not be accepted by the employer or income tax department. Rent receipts, rent agreements, and other supporting documents are required.

What is the maximum limit for HRA?

• The minimum limit for HRA exemption is calculated based on the actual HRA received, 50% (for metro cities) or 40% (for non-metro cities) of the salary, and the excess of rent paid over 10% of the salary. However there isnt a fixed maximum limit that can be claimed.