Get Smart with Your Money: Say Hello to HRA and Bye-bye to Tax Woes with Our HRA Calculator

House Rent Allowance, commonly known as HRA, is an important component of the salary structure for many employees in India

Get Smart with Your Money: Say Hello to HRA and Bye-bye to Tax Woes with Our HRA Calculator
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HRA, also referred to as House Rent Allowance, is a significant part of the compensation package for many employees. The company contributes to the employee's housing costs as a portion of their salary. The Indian Income Tax Act, which governs HRA, offers certain tax advantages to employees who receive HRA.

As long as the employee complies with certain requirements, HRA is tax-exempt under the Income Tax Act up to a certain threshold. The amount of the exemption varies depending on the city of residence, the employee's income, and the amount of rent they pay.

What is House Rent Allowance?

An essential part of salary structure is the house rent allowance, or HRA for short. It is the sum that the company must pay as a portion of the employee's salary. HRA, is the sum that an employer gives to an employee to cover their stay costs. Employees who use HRA to pay for stay expenses are eligible for tax benefits. Depending on the salary and city of residence, HRA allowance varies.

The provisions of the HRA are governed by Section 10(13A) of the Income Tax Act of 1961. Salaried employees benefit from the HRA's provisions. The main benefit of HRA is that it lowers the overall amount of taxable income. As a result, HRA reductions assist in lowering the amount of tax that the salaried individual must pay.

Both governmental and private sector organizations that pay salaries include an HRA component in their salary CTC breakup.

Self-employed people may also deduct HRA expenses under Section 80GG.

Before calculating the taxable income, the HRA amount is deducted from the total income. The HRA can be calculated based on an individual's salary. The tax-free component of the HRA must be at least one of the following amounts, as specified by income tax regulations:

  1. Actual HRA amount received
  2. 50% of the basic salary if the employee resides in metro cities (Delhi, Mumbai, Kolkata, or Chennai) (or) 40% of the basic salary if residing in non metro cities.
  3. The actual amount of rent paid minus 10% of the basic salary(basic + DA)
  4. If a person pays more than INR 1,00,000 in house rent, they are eligible for the HRA tax exemption. They must submit rental receipts and the property owner's PAN information in order to do this.

Calculation of HRA

Following are the rules applicable to claim HRA:

HRA is limited to 50% of the Basic Salary as per CTC.

Employees are not permitted to claim the entire rent cost. The least of the following constitutes the exemption amount:

  • If the employee lives in a metro cities (Delhi, Mumbai, Kolkata, or Chennai), the actual HRA amount received will be 50% of the basic income; otherwise, it will be 40% of the basic salary.
  • Ten percent of the basic salary (basic plus DA) will be deducted from the actual amount of rent paid

Individuals who also have a home loan are eligible for HRA tax benefits.

If the annual rent exceeds INR 1,00,000, the landlord's PAN card must be provided.

The rent amount that needs to be stated in the event of an NRI landlord must be reduced by 30% tax.

Eligibility Criteria for HRA

According to the Income Tax Act, an employee must satisfy certain eligibility requirements in order to claim the HRA exemption. The following are the prerequisites for getting HRA:

  • The employee must be paid salary and have HRA included in their benefits package.
  • The employee must be paying rent for the residence they live in. The rented lodging may be found in any Indian or international metropolis.
  • The employee or their partner may not be the owner of the rented property. The employee can request an HRA exemption for the rent paid even if they live in rented housing while working in a separate city where they own a home.The employee is responsible for paying the rent for the leased space. Rent payments made to immediate family members like parents or brothers are not exempt from the HRA.
    Rent agreement is required from the employee as evidence of rent payment. The employee must also provide the landlord's PAN information if the monthly rent paid surpasses Rs. 1 lakh annually.

It is significant to note that an employee cannot claim HRA exemption if they reside in their own home or do not receive HRA as part of their salary package. In addition, people who are self-employed or own their own company are not eligible for the HRA exemption.

Documents required to claim HRA Tax benefits:

Rent paid by the employee and the receipt should include:

  • Date
  • Name of the landlord
  • Name of the tenant
  • PAN card details of the landlord
  • Address of the accommodation
  • Duration of stay
  • Revenue stamp with the landlord’s signature
  • Photocopy of the rental agreement (if required)

For rent paid beyond INR 1,00,000 per year the employee has to provide the PAN card details can copy of the landlord in order to claim HRA tax exemption.

Also, an employee can pay rent to their father and claim tax exemptions with respect to HRA.

How is the HRA exemption calculated?

One of the most important parts of a person's salary is their HRA. It is the total sum that employers give to employees for housing. The HRA budgeted amount is tax deductible. Calculating HRA becomes crucial as a result.

The city of residency, the amount of rent paid, and the actual HRA received are just a few of the variables included in HRA computation. The HRA will be the least of the amounts shown below.

  1. Actual HRA paid by the employer
  2. 50% of salary for a metro city, and 40% of salary (Basic +DA) in case of a non-metro city. As per Income Tax provisions, only Delhi, Mumbai, Chennai and Kolkata are considered as metro cities in India.
  3. Rent paid in excess of 10% of salary (Basic +DA)

What is an HRA calculator?

A tool that makes it easier to calculate HRA and claim a tax deduction is the house rent allowance calculator. For those who are paid a salary, it quickly performs a complicated computation. Prior to determining the HRA amount, it takes into account the base wage, dearness allowance, HRA received, rent paid, and the city of residence. The inputs needed by the HRA calculator are as follows:

  1. Basic salary: It is the fundamental part of a salary. It is the very first line item on the salary slip's income side. Employees are fully taxed on their Basic.
  2. Dearness Allowance: It is the sum paid to offset the effects of wage inflation. DA is the second line item on the salary slip's income side. In the hands of employees, DA is fully taxed.
  3. HRA received: It represents the actual HRA that an employee receives from their company. It can be seen on the salary slip's income side.
  4. Total rent paid: It is the amount of rent that the employee actually pays.
  5. City of residence: The city of residency becomes crucial for HRA computation. This is so that the HRA can be calculated according to whether the employee lives in a metro area or a non-metro area. The HRA for a metro area is equal to 50% of the wage (Basic + DA). The HRA for a non-metro city is equal to40% of the pay (Basic + DA).

Once the taxpayer inputs the above data in the house rent allowance calculator, the output will be the actual HRA amount that he/she can claim as a deduction.

HRA Calculator can be accessed though with the below link

HRA Calculator for FY 2023-24

What are the benefits of using an HRA calculator?

Following are the benefits of using HRA calculator:

Ease of use

All one needs to do to calculate HRA is enter the information. information on their basic pay, HRA, rent, and whether they reside in a metropolis, among other things.

Accurate results

The calculations are precise and assist salaried people in determining the amount that is exempt from tax and the amount that is subject to HRA tax.

Fast computation

The calculator makes it easier to calculate results quickly. Nobody has to be concerned about manually performing the difficult calculations. The calculator helps you save time and work.

Better Planning

One can better plan their income taxes and budgets by computing the HRA exemption and taxable part.

Free to use

The calculator is freely usable and accessible online. Therefore, the calculator is available to everyone who is interested in learning how much of an HRA is free from tax and how much is taxable. The calculator can be used numerous times to compare various income possibilities.

Employees can take advantage of a number of perks from HRA, a tax-saving investment option. That is not the only investment strategy that can reduce taxes, though. The HRA is contrasted with a few other tax-advantaged investing alternatives here:

Comparison of HRA other Tax-saving investment options

Employees can benefit from a number of tax-saving investment options, such as HRA. However, it is not the only tax-saving investment option available. The HRA is contrasted with a few other tax-advantaged investing alternatives here:

  • Public Provident Fund (PPF): Section 80C of the Income Tax Act provides tax advantages for PPF, a long-term investment alternative. With a 15-year lock-in period, it provides tax-free returns. PPF offers tax benefits on long-term investments, whilst HRA offers tax savings on rental payments.
  • Equity-Linked Savings Scheme (ELSS): ELSS is a mutual fund scheme that invests in equity and offers tax benefits under Section 80C of the Income Tax Act. It offers the possibility of better returns than other tax-saving investing options and has a three-year lock-in period. While ELSS offers tax benefits on investments in equity, HRA offers tax benefits on rental expenses.
  • National Pension System (NPS): The NPS is an investment option with a long-term retirement emphasis that provides tax advantages under Sections 80C and 80CCD(1B) of the Income Tax Act. It offers the possibility of larger returns than other tax-saving investing options and has a lock-in term until age 60.

It is crucial to take one's financial objectives and investment horizon into account when selecting a tax-saving investment strategy. Also, employees can combine several tax-saving investing strategies to optimize tax benefits and reach their financial objectives.

Ways to increase HRA benefits

There are various methods in which employees can boost their HRA benefits and maximize their tax savings. One of these methods is:

  1. Negotiate a higher HRA component in the compensation package: Employees have the right to ask for a larger HRA component in the compensation package during wage negotiations. This may help to increase the HRA's tax exemption.
  2. Employees must provide rent receipts or a rental agreement with the landlord as proof of their rental expenses in order to claim tax benefits on HRA. Employees can make sure they get the full tax exemption on HRA by turning in these receipts.
  3. Pay rent by check or bank transfer: Doing so will help you keep track of your rental payments. It is recommended that you use a check or bank transfer to pay your rent. For claiming tax advantages on an HRA, this record may be used as evidence of rental expenses.
  4. Choose a higher rental accommodation: Employees who want to receive more HRA benefits may want to explore choosing a higher rental property. While the tax exemption on HRA is based on the actual rent paid, this can help maximize the exemption.
  5. Plan your HRA and other tax-saving investments so that you can optimize your tax savings. Employees can plan their HRA and other tax-saving investments in this way. If an employee qualifies for both the HRA and the deduction under Section 80C of the Income Tax Act, for instance, they can organize their investments such that they can maximize their tax benefits under both sections.

Importance of accurate record-keeping

When it comes to HRA, accuracy in record-keeping is crucial since it enables employees to collect the maximum tax benefits and stays clear of any penalties or legal issues. For HRA, proper record-keeping is crucial for a number of reasons, including:

  1. Employees must show documentation of their rental expenses in order to obtain HRA tax benefits. This proof can be in the form of rent receipts or a rent agreement with the landlord. To guarantee that employees may claim the full tax exemption on HRA, accurate record-keeping of these receipts is crucial.
  2. Legal compliance: Employers are expected to keep proper records of the HRA they pay their employees under the Income Tax Act. Also, employees must keep thorough records of their rental costs. Failing to comply with these legal obligations might result in penalties and legal difficulties.
  3. Tax deduction reconciliation: Proper record-keeping can assist employees in reconciling their tax deductions and ensuring that they have claimed the correct amount of tax advantages on HRA. The likelihood of a tax audit or probe can be decreased and any anomalies in the tax filings can be avoided.

About Jordensky

At Jordensky, we specialize in accounting, taxes, MIS, and CFO services for Startups and growing business and are focused on delivering an experience of unparalleled quality. When you work with Jordensky, you get a team of finance experts who take the finance work off your plate – ”so you can focus on your business.”

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Co-Founder of Jordensky