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How to calculate HRA from salary

House Rent Allowance (HRA) is provided by employer to employee as a part of consolidated Salary or you can say Cost to Company (CTC) to meet rent of accommodation. HRA is exempted up to some extent as per section 10(13A) of the Income Tax Act, 1961 and Rule 2A hence it is necessary to understand that How to Calculate House Rent Allowance – HRA.

Minimum of following three amounts is available as HRA exemption:

  1. Actual House Rent Allowance provided by employer to employee.
  2. House Rent paid in excess of 10% of Salary.
  3. 50% of Salary in case House is located in Metro cities (Mumbai, Delhi, Kolkata, Chennai) or 40% in case of any other cities.

Important Definitions:

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Relevant Period: For all three conditions mentioned above relevant period is very important. Means if there is any change in Salary, HRA paid to employee, location of rented house and actual rent paid by employee HRA need to calculate from that relevant change.Hence one should avoid calculating HRA on annual basis if there is any change in above factors.

Salary: Meaning of Salary for calculating HRA (Basic Salary + Dearness allowance if terms of employment so provide + fixed percentage of turnover achieved by employee)

Important Points:

  1. Salary is to be taken on due basis for calculating HRA.
  2. If employee has not paid rent, no HRA exemption is allowed.
  3. If employee is leaving in his own house, no HRA exemption is allowed.
  4. Employee requires to submit rent receipt to employer with details regarding Name of Land Lord, address of property, period and mode of payment.
  5. Rent Receipt should be duly signed in with one rupee revenue stamp.
  6. Employee should deduct TDS @10% from rent paid to land lord  if rent paid  is in excess of Rs. 180000 during the financial year.

Example:

For Financial Year 2011-12

Mr. Sachin  is drawing basic salary Rs. 80000 p.m.

Dearness allowance Rs.8000 p.m. which is form part of retirement benefits.

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HRA received Rs. 25000 p.m.

He pays rent of Rs. 20000 p.m. in Mumbai.

Answer:

Minimum of Three is allowed as HRA exemption:

1. Actual HRA Received ( 25000 x 12) 300000
2. Rent paid in excess of 10% of Salary ((20000 x12)- 10%(1056000)) (Note-1) 134400
3 50% of Basic salary (50% of 1056000) 528000

Hence Rs.134400 is allowed as HRA exemption and Rs. 165600 (300000-134400) is taxable HRA.

Note-1

Salary for  HRA Calculation

1. Basic Salary ( 80000 x 12) 960000
2. Dearness Allowance ( form part of salary benefit( 8000 x 12 ) 96000
Total Salary for HRA calculation 1056000

How to calculate HRA from salary

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