House rent allowance or HRA is a core component of one's salary. It is given to every salaried employee towards meeting the cost of renting of house in the city of work. HRA gets special treatment in tax liability calculations and is exempt from income tax to a certain limit.

When you are calculating HRA for tax

exemption you take into consideration four

aspects, which include: salary, HRA received, actual rent paid and the city where you reside (metro or non-metro). If they remain constant throughout the year, then the tax exemption is calculated as a whole annually. If they are subject to change, as in the case of a rent hike or shift in residence etc, then it is calculated on a monthly basis. The place of residence is significant in HRA calculation as for a metro the tax exemption for house rent is 50 per cent of the basic salary while for non-metro it is 40 per cent of the basic salary.
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How to calculate HRA?

Let us consider an example to understand how HRA exemption is calculated. Sameer Shah is working with an IT company and resides in a rented house in Mumbai for which he pays Rs 25,000 per month as rent. His monthly basic salary is Rs 60,000 and actual HRA received is Rs 20,000. Least of following values are considered to find out HRA tax exemption: Actual HRA received [Rs 20,000 in the case Sameer Shah] 50 per cent of the basic salary if residing in a metro [In Sameer’s case, Rs 30,000] Or 40 per cent of basic salary if residing in non-metro city [Rs 24,000 in this case] Actual rent paid minus 10 per cent of basic salary [Rs 19,000 in this case] As per the above calculation, the least of all values is Rs 19,000 which is allowed as

HRA exemption.How to optimize HRA exemption benefits?

Many tax payers have a question in their mind that how they can utilise the benefit of HRA if they are not living in a rented house. If you are staying with parents and paying them the rent, then in that case you can claim the rent paid to your parents. In this case your parents will be the landlord and you can show the rent paid in the tax calculations for HRA. But please make sure that your parents show the rental income in their records to avoid any discrepancy in the future. You, however, cannot claim rent paid to your spouse for the purposes of exemption.

Home loan and HRA

Many investors are also stuck when it comes to claiming exemption from HRA and home loans together when they buy a new house. The most obvious question is that can they get the benefit of HRA exemption along with housing loan? As per the Income Tax Act there is no restriction on claiming home loan and HRA benefit together. If you have taken a home loan for the purchase of a house but staying in rented house due to some genuine reason, in that case you can claim the benefit of HRA and the principal and interest component of the home loan as well.

Following are some of the cases considered

as genuine for staying in rented house inspite of having taken a home loan: The house which you own is located far from your work place and is inconvenient to commute. You have bought house in one city but due to a job transfer you have to live in another city. If you have taken home loan but house is yet not ready to move into or occupy.

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Income Tax India
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