HRA is a special allowance specifically granted to an employee by his employer towards payment of rent for residence of the employee. HRA can be claimed by people who get HRA in their salaries or by individual tax payer.
How to calculate HRA :
- Actual HRA
- Rent paid(-)10% of salary for the relevant period
- 50% of salary for the relevant period (in metro cities (Delhi, Kolkata, Mumbai, Chennai)
- 40% of salary for the relevant period (other cities)
Whichever is lower is taken as HRA.
Mr. Vineesh, employed in Delhi, has taken up an accommodation on rent for which he pays a monthly rent of Rs.15,000 during the Financial Year (FY) 2019-20 i.e. Assessment Year(AY) 2020-21. He received a Basic Salary of Rs 25,000 and DA of Rs.2,000 every month. He also received a HRA of Rs.1,00,000 from his employer during the year. Let us understand the HRA component that would be exempt from income tax for the FY 2019-2020
In the above example,the entire HRA received by Mr. Vineesh (Rs.1,00,000) from his employer is exempt from income tax.
- “Salary” for the purpose means basic salary,dearness allowance in terms of employment and commission as a fixed percentage of turnover.
- “Relevant period” means the period during which the said accommodation was occupied by the assessee during the previous year.
- Exemption is not available to an assessee who lives in his own house,or in a house for which he has not incurred the expenditure of rent. Such an assessee can claim 80GG deduction under Chapter VI-A.