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How to calculate your HRA Tax Exemption

Earlier I had blogged about 'Rules for claiming tax benefit on HRA tightened'. 

As mentioned therein, the tax exemption on House Rent Allowance (HRA) received by you as an employee, is minimum of the following:

a)  The actual amount of HRA received
b)  Actual rent paid minus 10% of the salary
c)  50% of the salary (in a metro city) / 40% of the salary (for any other city)

I guess an example will give a clearer understanding of the workings involved.

Input data
HRA received = Rs.15,000 p.m.
Rent paid = Rs.12,500 p.m.
Basic pay = Rs.25,000 p.m.
Dearness Allowance = Rs.10,000 p.m.

(Note: For house rent allowance tax exemption calculation purposes, ‘salary’ includes only your basic + DA; and excludes all other allowances and perquisites).

hra-tax-exemption
How to calculate Tax Exemption on your House Rent Allowance

Calculations 
1. Annual HRA received = Rs.15,000 * 12 = Rs.1,80,000

2. Annual Salary = Basic+ DA = Rs.35.000 * 12 = Rs.4,20,000  
    Annual Rent - 10% of Annual Salary = Rs.12,500 * 12 - 10% * Rs.4,20,000
                                                                  = Rs.1,50,000 - Rs.42,000
                                                                  = Rs.1,08,000

3. Assuming you stay in Mumbai 
    50% of Annual Salary = 50% * Rs.4,20,000 = Rs.2,10,000

Tax exemption
Minimum of the amounts under 1, 2 and 3 i.e. Rs.1,08,000

In other words, out of Rs.1.80 lakhs received as HRA, Rs.1.08 lakhs would be exempted from your taxable income and the balance Rs.72,000 would become taxable.

IMPORTANT
- You can't claim HRA Tax Exemption if you are staying in your own / spouse's house
- You CAN pay rent to parents if they own the house and claim tax exemption

PLUS POINT
You can claim BOTH 
(a) tax exemption on house rent allowance and 
(b) tax benefit on interest and principal repayment towards your home loan.


[This post is an update of earlier blog posted on Dec 26, 2013]

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