How to calculate HRA Exemption amount?

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HRA Tax Exemption

As explained above, HRA exemption can only be claimed by employee if he's living in the rented accommodation and is paying regular rent. Tax treatment of HRA is as below:
This calculation requires 4 information – the city you live in, the basic salary that you receive, what rent you pay and what is the actual HRA benefit that you get. HRA exemption amount will be least of the below 3 options:

1. 50% of basic salary where residential house is situated in a Metro city like Delhi, Mumbai, Kolkata or Chennai, Else 40% of basic salary where residential house is situated at some other place.
2. Actual Rent Paid minus 10% of basic salary.
3. Actual HRA Received

Here Basic salary means Basic+ Dearness allowance.

Let's Understand the HRA exemption clause with an example:

Ramesh lives in a rented accommodation in Delhi and Pays monthly rent of Rs 20000/-. His Annual salary package details are as under. What would be the HRA exemption limit in this case?

Basic – Rs 480000
HRA – Rs 240000
Medical Allowance – Rs 15000
Special Allowance – Rs 200000

Solution:

As Ramesh lives in a metro city, so the HRA exemption limit would be the least of following:

1. 50% of basic = Rs 240000/-
2. Actual Rent Paid minus 10% of Basic = (20000*12-48000)=192000/-
3. Actual HRA Received = Rs 240000/-

The Least of the above is Rs 1.92 lakh. Out of total HRA received Rs 1.92 lakh will be deducted and remaining will be added in the gross taxable income and will be taxed as per income tax slab one falls in.

Other Important points to note to claim HRA exemption:

1. If you are living with your parents, you can pay rent to them and claim HRA exemption. But in this case your parents have to show this rent as their income and pay tax accordingly.
2. You cannot pay rent to your spouse and claim exemption.
3. Your city of residence will be counted to calculate HRA exemption limit. For e.g if you work in a metro city but reside in Non metro city then in this case you will be entitled to 40% benefit as explained above.
4. If you own a house in one city, but resides in other city due to employment reasons, you are eligible to claim HRA exemption. If your own house is on loan, then you can also claim home loan tax benefits along with HRA benefit.

How to claim HRA exemption?

You need to submit the Actual Rent receipts to your employer as a proof of rent payment. Many companies ask for Rent agreement also. On the rent receipts basis employer calculates the HRA exemption benefit and deducts TDS accordingly. Here's one loop hole which employees generally takes advantage of. Till now, if the rent payment was below Rs 15000/- there's no requirement of submitting landlord's PAN number along with Rent receipts and thus up to that prescribed amount employees sometimes furnish Fake rent receipts to claim for HRA exemption.

Let me explain this with an example:

Below are the details of Ramesh's Monthly salary slip.

Basic: Rs 30000 ; HRA: Rs 12000

His place of Residence is Chandigarh and he pays monthly Rent of Rs 10000/-
So technically his HRA exemption calculation would be as follows .

1. 40% of basic = Rs 1,44,000 (40%*360000)
2. Rent paid minus 10% of basic = Rs 84000 ( 120000-36000)
3. Actual HRA = Rs 1,44,000

Least of above 3 is Rs 84000/-, so for Ramesh HRA Exemption amount should be Rs 84000/-. But he furnished Rent receipts of Rs 14500/- per month to employer. This has increased his HRA exemption amount to Rs 138000/- (as per calculation in step 2). So where Rs 60000/- would have to be added in his Gross total income, due to the fake rent receipts only Rs 6000/- was actually added.

Latest amendment announced in October'2013

But now CBDT is trying to plug this loop hole and thus from FY 2013-14 all salaried tax payers who claim HRA exemption will now have to report their landlord's PAN number if the total Rent in a year exceeds 1 lakh. This means the limit which was earlier Rs 15000/- has been reduced to Rs 8333/- per month. In case landlord does not have PAN number, then employee has to submit a declaration by landlord stating the same along with his name and address. This will serve dual purpose for IT authorities, as they can keep a check on landlord if he's paying taxes on this income or not and also this will act as a deterrent to the employees in tax evasion. So now onwards whenever you furnish rent receipts to your employer which is more than 1 lakh a year, don't forget to mention the PAN Number of your landlord.

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