Picture this. You're a young professional starting to work in a new city, trying to make ends meet. That's when you hear about House Rent Allowance or HRA, which can help you reduce your tax liability and save some extra bucks. Now you wonder what HRA means in the salary slip and how it can help manage your finances better. This blog's got you covered.
HRA, or House Rent Allowance, is part of an employee's salary given to them by the employer to cover their rental expenses. The HRA amount received by the employee depends on their salary, the city where they work, and the actual rent they pay for their accommodation.
Though HRA is a part of your salary, it's not entirely taxable. Under Section 10 (13A) of the Income Tax Act of 1961, the government excluded a portion of HRA from taxation, subject to some provisions. Such as -
*Only salaried individuals can avail the benefits of HRA. You can't claim HRA if you are a self-employed individual.
*You can get an exemption only if you live in a rented place. You can't claim an HRA if you own a house or don't have to pay rent.
*You can't benefit from HRA tax exemption if you choose the new tax regime for taxation.
HRA can help reduce an employee's tax liability as the government provide HRA exemption to a certain extent. The HRA tax exemption depends on the amount of HRA received, Dearness Allowance (DA), the employee's salary, and the rent paid. Consider the following to calculate the HRA exemption amount -
*Actual HRA in salary
*50% of [basic salary + DA] if they live in metro cities (Mumbai, Kolkata, Chennai, Delhi, Hyderabad, or Bengaluru), or 40% if they live in other cities
*The rent paid minus 10% of [basic salary + DA]
The lowest of the above three amounts is the tax exemption on HRA.
Example: Suppose Ms Vanita earns a monthly salary of ₹50,000, and she receives an HRA of ₹20,000. The actual rent she pays for a rented apartment in Bengaluru is ₹15,000 per month. Now, the tax exemption on HRA will be -
*Vanita's actual HRA = ₹20,000
*50% of her salary = ₹25,000 (since she lives in a metro city)
*Actual rent paid minus 10% of her salary = ₹15,000 - (10% of ₹50,000 = ₹5,000) = ₹10,000
The minimum amount of all is ₹10,000. So, this person's tax exemption on HRA is ₹10,000 per month. The remaining ₹10,000 (₹20,000 - ₹10,000) will get added to her taxable salary and taxed as per her income tax slab.
House Rent Allowance (HRA) is a powerful ally for young professionals seeking financial stability in a world where every paisa counts. By unravelling the intricacies of HRA in salary and mastering the art of claiming HRA tax exemption, you hold the key to reducing your tax burden and bolstering your savings. With the knowledge of HRA provisions and the calculation methods, you can strategically optimise your salary and pave the way for a brighter financial future.
You can rely on Fi Money's online calculator to simplify determining your House Rent Allowance (HRA) in your payslip. Head to this link, and you will gain access to a user-friendly tool designed specifically to calculate HRA. This calculator considers your salary, city of residence, and actual rent paid. With just a few inputs, you can quickly and accurately determine the tax exemption on your HRA. Plus, if you have a Federal Bank Savings Account via Fi, you can use its AI-powered analyser to track your spends accurately.
To calculate HRA exemption for tax purposes, the employee should figure out the minimum of the below three components -*Actual HRA amount paid by the employer
*50% of [basic salary + DA] if living in metro cities, or 40% if living in non-metro cities
*Actual rent minus 10% of [basic salary + DA]
The amount arrived at after this calculation is the maximum HRA one can claim for exemption from tax. The remaining amount of HRA, if any, is taxable as per the tax slab of the employee.
Step 1: Find the minimum of the following three amounts:
*Actual HRA amount given by the employer
*50% of [basic salary + DA] if living in metro cities, or 40% if living in non-metro cities
*Actual rent minus 10% of [basic salary + DA]
Step 2: Calculate the total amount of HRA received from the employer during the financial year.
Step 3: Deduct the amount obtained in Step 1 from the amount calculated in Step 2. It will give you the taxable part of HRA.
Step 4: The amount you get in Step 1 is the exempted part of HRA. You can claim this amount as a deduction while filing your income tax returns.
Only salaried individuals can avail the benefits of HRA. Self-employed individuals are not eligible to claim HRA tax exemption.
