HRA or house rent allowance is probably the second largest number on your salary slip and one of the most prominent allowances. If you are staying on rent HRA is an important tax saving component for you.
Thus, it’s always better if you understand this important component of your total salary, and how you can maximize your benefit from it.
What is HRA?
HRA is one of the few allowances which are still partially exempt and can help you save tax. The employers include this allowance in your salary package to cover the cost of rented accommodation and to pass on the tax benefit related to it.
For the current assessment year, if you are not paying rent but receiving HRA, your entire allowance may be taxable. However, from the assessment year 2021-22, you can keep your tax liabilities lower with the new tax slab scheme.
How Tax Saving Works on House Rent Allowance
House rent allowance is partially exempt depending on a few factors. The first and most crucial factor is, of course, you need to pay rent. If you do not stay on rent, you cannot claim the exemption on HRA. The entire allowance will form part of your gross taxable income, in this case.
Taxability or tax-exemption of HRA depends on the following factors:
You should note that “income” for HRA is different from your CTC or in-hand income. The income for HRA calculations will consist of the following:
Example of a salary slip with HRA
Thus, for example,
If your salary structure looks something like given in Image 1, your monthly income for HRA calculation will be Rs. 49,000
If your salary structure looks like Image 2, your monthly income for HRA calculation will be Rs. 69,200
Revised Salary & Salary Structure after mid-year job switch
Calculating Your HRA Exemption
HRA exemption depends majorly on two factors and may change throughout the year based on these two:
1. The rent you pay
2. Your salary or salary structure
Any change in these two will warrant you to recalculate your HRA exemption. Although there are other factors too which may need you to recalculate your exemption, they are less prominent. For example, change of employment from a metro city to a non-metro city.
Thus, there would be following three major scenarios:
1. Level income and rent payment throughout the financial year
2. Level income but changed rent payment in the middle of the year
3. Income changes in the middle of the financial year but rent remains the same
You can create more extrapolations of these events but for the majority of the cases, these will be relevant for recalculation.
The HRA is exempt to the extent of the minimum of the following three numbers:
A. Total HRA Received in the FY
B. 50% of Income for HRA Estimates; i.e. Basic + DA + Turnover based commission (40% in case of any other place than Delhi, Mumbai, Kolkata & Chennai)
C. Rent Paid over 10% of Income for HRA purpose
HRA Exemption in Scenario 1 – Unchanged Income & Rent
Assuming your salary remains the same as given in Image 1, and you pay a rent of Rs. 30,000 per month throughout the FY 2019-20.
You can claim Rs. 2.94 lakhs as exemption out of the Rs. 3.12 lakhs of HRA received in the year. Rs. 18,000 will be the taxable HRA and will become part of gross taxable income.
Detailed calculation is given below:
|B||Total Rent Paid||3,60,000|
|C||Total HRA Received||3,12,000|
|D||50% of Basic + DA||2,94,000|
|E||Rent Paid over 10% of Income (i.e. Basic + DA)||3,01,200|
|F||Exempt HRA (Lowest of C, D & E)||2,94,000|
|G||Taxable HRA to be Part of Gross Taxable Income (C - F)||18,000|
Your taxable income will reduce by Rs. 2.94 Lakhs in this scenario.
Note: If you are residing in a non-metro city, estimate of 50% in point D will change to 40% of income for HRA estimate.
HRA Exemption in Scenario 2 – Unchanged Income & Rent Changes
Again, assuming the uniform salary throughout the financial year as per Image 1. But this time your rent payment changes from Rs. 30,000 p.m. to Rs. 35,000 p.m. from Aug 2019.
So, within the first four months of FY 2019-20, you end up paying Rs. 120,000 as rent, while in the last eight months (Aug 2019 – March 2020) you pay a total rent of Rs. 280,000.
|April - July||Aug – March|
|C||50% of (Basic + DA)||98,000||1,96,000|
|D||Rent Paid over 10% of Income (i.e. Basic + DA)||1,00,400||2,40,800|
|E||Exempt HRA (Lowest of B, C & D)||98,000||1,96,000|
|F||Taxable HRA to be Part of Gross Taxable||6,000||12,000|
|Total Taxable HRA in AY 2020-21||18,000|
In this scenario, the change in the rent payment failed to affect your HRA exemption. Thus, your taxable HRA remains the same. Can you spot the reason why?
Your taxable income reduces by Rs. 2.94 Lakhs in this scenario.
HRA Exemption in Scenario 3 – Income Changes & Rent Stays the Same
This time while you keep on paying the same Rs. 30,000 a month as rent, your income changes from the salary slip in Image 1 to Image 2 from August 2019.
Meaning, your net monthly income will be Rs. 69,200 for HRA calculation. Which is the sum of your new Basic Salary and 50% of the dearness allowance (DA).
Your HRA Exemption will play out as given below in this scenario:
|April - July||Aug – March|
|C||50% of (Basic + DA + Variable Commission)||98,000||2,76,800|
|D||Rent Paid over 10% of Income (i.e. Basic + DA)||1,20,000||2,40,000|
|E||Exempt HRA (Lowest of B, C & D)||98,000||2,40,000|
|F||Taxable HRA to be Part of Gross Taxable Income||6,000||40,000|
|Total Taxable HRA for FY 2019-20||46,000|
With the increase in salary coupled with the changes to salary structure increases your taxable HRA amount from Rs. 18,000 to Rs. 46,000.
Your taxable income reduces by Rs. 3.38 Lakhs in this scenario.
So, you can see HRA and rent payment can help reduce your taxable income to a great extent. However, you may have to recalculate your HRA exemption more than once even if your income stays the same if your salary includes turnover based commission.
Since you cannot predict the amount of commission income you will receive through the year, you will need to recalculate HRA at the end of the financial year.
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