What is HRA?
HRA is a component of your salary that helps offset the expenses incurred on renting a house. Many employers provide HRA to their employees.
HRA Exemption under the Income Tax Act
The Income Tax Act allows you to claim exemption on a portion of your HRA. This reduces your taxable income, leading to potential tax savings.
Calculating Your HRA Exemption
The HRA exemption is the lowest amount among the following three:
1.Actual HRA Received: This is the amount your employer mentions as HRA in your salary slip.
2.Rent Paid Minus 10% of Basic Salary:
- Here, "Basic Salary" refers to your base pay before any allowances are added.
- You'll need to deduct 10% of your basic salary from the actual rent you pay for your accommodation.
- Metro Cities (Mumbai, Delhi, Chennai, Kolkata): 50% of your (Basic Salary + Dearness Allowance)
- Non-Metro Cities: 40% of your (Basic Salary + Dearness Allowance)
- Dearness Allowance (DA) is an allowance provided to compensate for inflation.
Example: Let's Calculate!
Say you live in a non-metro city and receive the following:
- Basic Salary: ₹25,000 per month
- Dearness Allowance: ₹2,000 per month
- HRA: ₹12,000 per month
- Actual Rent Paid: ₹15,000 per month.
Calculating the HRA Exemption:
- Actual HRA Received: ₹12,000
- Rent Paid Minus 10% of Basic Salary:(Basic Salary + DA) per month = ₹27,000 10% of (Basic Salary + DA) = ₹2,700 Rent Paid - 10% of (Basic Salary + DA) = ₹15,000 - ₹2,700 = ₹12,300
- HRA Limit (Non-Metro City): 40% of ₹27,000 = ₹10,800.
HRA Exemption: In this case, the lowest amount is ₹10,800 (HRA Limit). So, you can claim an HRA exemption of ₹10,800 per month, reducing your taxable income.
Important Note:
- You'll need rent receipts and a rent agreement as proof while filing your Income Tax Return (ITR) to claim the HRA exemption.
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