ITR Filing: As the deadline for filing Income Tax Returns, 31st July, approaches, everyone is gearing up for it. When it comes to tax saving, House Rent Allowance (HRA) plays a significant role. It offers tax exemptions on a substantial amount of money.
However, HRA is a component of your salary that doesn’t provide benefits automatically; instead, it requires a complete calculation in three steps. Many people mistakenly believe that the HRA their company provides is entirely tax-free, but the reality is quite different. Let’s understand the complete calculation of HRA and find out how much tax exemption it provides.
Out of these 3 you will get the lowest HRA
When you file for HRA, you are required to calculate three different types of figures. The tax relief is determined by the lowest figure among them. The initial step involves claiming the HRA portion offered in your salary by the employer.
HRA is different in metro and non metro
Now, discussing the second aspect, in metro cities, you can claim HRA on up to 50% of your basic salary. On the other hand, in non-metro cities, you can claim HRA on up to 40% of the basic salary.
Calculation from rent and basic salary
Now, discussing the third parameter, you must subtract 10% of your basic salary from the total annual rent of your residence to determine this figure. Remember, only deduct 10% from the basic salary component, not the entire salary. The amount left after this deduction is what you can claim under HRA.
Let’s understand with an example
Let’s assume your basic salary is Rs. 3 lakh per annum, and you reside in a metro city where your monthly rent is Rs. 15,000. Additionally, your salary structure includes a house rent allowance (HRA) of Rs. 1.6 lakh per annum provided by your company, which you can claim under the first scenario. Moreover, in a metro city, the basic salary constitutes 50%, which amounts to Rs. 1.5 lakh per annum, eligible for HRA claim under the second scenario.
Now let us understand the calculation of the third situation
If you spend Rs. 15,000 monthly on rent, it translates to an annual expenditure of Rs. 1.80 lakh on housing rent. In this context, for the third scenario, after subtracting 10% of the basic salary from this rent amount, which is Rs. 30,000 (10% of Rs. 3 lakh), you can utilize the remaining amount as eligible for HRA claim. This equates to Rs. 1.80 lakh – Rs. 30,000 = Rs. 1.50 lakh.
You can claim HRA of Rs 1.5 lakh
While you receive a house rent allowance (HRA) of Rs. 1.60 lakh annually from your employer, your eligible claim under HRA is limited to Rs. 1.50 lakh. Hence, when strategizing for tax planning, compute the HRA amount at that moment, rather than basing it solely on the salary structure associated with HRA, as even a slight increase of Rs. 1 can inadvertently impact tax obligations.
