HRA Calculation: Formula, Exemption, Tax Benefits and Examples

Key Takeaways:
 

• HRA calculation totally depends on the officially declared three conditions mentioned under the section 10 (13A).
   
• Using a reliable HRA calculator helps to estimate the exemption. However, one should have knowledge about the formulae used to calculate HRA. 
   
• HRA calculation may vary for metro and non-metro cities. Government employees have different rules as per the HRA calculation 7th pay commission. 

You know how we all get excited when we receive a message on our phones for our salary being credited. We all just check how much we have received instead of checking how it is actually calculated. Probably none of us do so much thinking right?

If you are working for an organization and receiving a House Rent Allowance this is very important for you. In place of blindly trusting, we must know the logic behind the HRA calculation income tax rules, plus point? It can literally save you tax every single year. 

What is HRA? Who defined it? 

Mumbai, the city where dreams come true, where one of your dreams came true. You just got your first job in Mumbai. Receiving ₹60,000 straight in your bank account, sounds amazing right? But then comes the reality check. ₹25,000 just for rent? GONE IMMEDIATELY. 

But then you check your salary slip and see something called HRA. You start wondering what it is? Is this some kind of extra money you will get from the organization? Will it add on more tax?  

So, officially, HRA exemption is mentioned under Section 10(13A) of the Income Tax Act, 1961 along with Rule 2A of the Income Tax Rule. These rules are not just randomly created, they are the official government-backed provisions. 

Let’s get back to Mumbai. As per official rules: 
 

1. Actual HRA = ₹20,000
2. Rent paid (10% of the salary) = ₹25,000-4000 = ₹21,000
3. 50% of the salary, as Mumbai is a metro city, = ₹20,000

The lowest amount is ₹20,000, which becomes tax-exempt. It means you won’t need to pay tax for this amount of your salary. 

And this is how you will save yourself a bag load of tax money. This is the power of knowing how HRA in salary per month actually works, how it’s calculated, and how income tax actually works. 

HRA Calculation in Salary Per Month 

As per the official Rule 2A, the total of HRA is the lowest of the three given below:
 

1. Actual House Rent Allowance received.
2. Rent paid - 10% of the actual salary.
3. 50% of salary in metro cities, and 40% salary in non-metro cities.

Here salary means is the sum of Basic and DA, where DA is part of a retirement benefit (if applicable). 

Still wondering how to calculate HRA in salary per month? Here is how you can do it:

Let’s say that your basic salary is ₹40,000 a month, so, the HRA will be ₹20,000 a month, and your monthly rent is ₹18,000. You are living in a metro city. Now calculate:

1. HRA = ₹20,000.
2. Rent (10% of salary) = ₹18,000 - ₹4,000 = ₹14,000.
3. 50% of salary (living in a metro city) = ₹20,000 
4. Lowest = ₹14,000.

So, ₹14,000 per month will be exempt. Meanwhile, remaining HRA will be taxable. That is how you calculate the HRA practically. 

HRA Calculation 7th Pay Commision- Government Employees 

The HRA calculation 7th pay commission rates are officially classified as following:
 

1. 27% for X cities 
2. 18% for Y cities
3. 9% for Z cities 

These rates are officially revised on the basis of the DA slabs by the Department of Expenditure. This is why the HRA calculation of the private sector employees varies from the 7th pay commission. 

Bonus Tip: If somehow you forgot to submit your rent receipt to your employer, you can still claim the HRA calculations by referring to the ITR while filling the return under the old tax regime. 

HRA Allowance Calculation- Common Mistakes 

Some of common mistakes that people make during HRA allowance calculation are:

1. Calculating using the monthly figures instead of annual totals.
2. Not keeping track of the salary changes and using the old adjustings during the year.
3. Neglecting the metro classifications. 

All of these factors play a very important role while you are calculating your HRA. However, the most important pointer is to consider the salary changes during the financial year. 

Do You Really Need an HRA Calculation Calculator?

Yes, but realistically, it’s probably a big “No”. 

Using an online HRA calculation calculator is much more time saving and calculates the estimates. But what if your rent or salary suddenly changes mid-year? Manually understanding and calculating HRA is far better. If you are really serious about tax planning, then understanding HRA calculation is better in order to save tax. Do not rely on tools blindly. 

FAQs

Is HRA exemption calculated monthly or yearly?

Employers can compute HRA monthly for payroll processing. However, according to Section 10(13A) and Rule 2A of the ITR, the HRA is calculated annually. 

Can I claim HRA if I didn’t submit rent proof to my employer? 

Yes, you can. By filing your ITR under the old tax regime and correctly reporting your HRA calculation for ITR. 

How is the HRA exemption calculated under section 10(13A)?

Under the HRA calculation income tax provisions, the exemption is calculated as per Rule 2A is the least of actual HRA received, rent (10% of the salary), 40-50% of salary (metro and non-metro cities). 

How does HRA calculation work under the 7th pay commission? 

HRA for the central government employees is determined under the 7th central pay commission and Department of expenditure. 

Can I claim HRA if I live with my parents?

Yes. Even if you live with your parents and declare it as rental income, proper rent agreement and bank proof are required.