What​‍​‌‍​‍‌​‍​‌‍​‍‌ is HRA in salary

Maybe you are a salaried employee and while looking at your payslip found the term HRA and thought, "What is HRA and why is it included in my salary?" Well, let's analyze it in the easiest way possible.

Understanding of HRA

HRA is the acronym for House Rent Allowance. It is the part of your income, which your employer grants to you to keep up with the rent of a house if you are living in a rented accommodation. Besides being a component of salary, HRA serves as a relief as it lowers one's taxable income which literally means the paying of a lesser tax.

Who Enjoys the Benefits of HRA?

HRA is a benefit which salaried employees who secure a shelter through renting can enjoy. If such is your case, it is possible for you to make a tax exemption on at least part of the HRA that would greatly lighten your financial burden. The truth is a spade is a spade: self-employed people are not entitled to HRA, but they do have the privilege of claiming some deductions under different tax provisions.

How do they figure out HRA?

It doesn't work like a one-size-fits-all formula when it comes to figuring out HRA. The amount of money you will get as well as the level of tax exemption that you can claim will depend on a few factors:

Your basic salary — Most of the time, HRA is figured out as a certain-percentage of your basic pay.

Place where you live — If you happen to live in a metro city like Mumbai or Delhi you can enjoy HRA to the extent of 50% of your basic salary. The rate will be 40% for non-metropolitan cities.

The rent you actually pay — Rent receipts that you present are necessary. The exemption will be determined by your rent less a certain portion of your salary.

The government uses the following three values to determine the tax-exempt amount. The amount of the lowest of the three is the tax exemption:

HRA that you actually got

Rent that you have to pay besides 10% of your basic salary
50% or 40% of your salary with regard to the city where you live
You are allowed to save tax only on the lowest amount out of these.

A Real-Life Example

Let's say; your monthly basic salary is ₹30,000, HRA is ₹13,000 and the rent is ₹10,000. In case you are living in a metro city, then half of your salary would be ₹15,000.

Actual HRA received: ₹13,000
Rent paid minus 10% of salary: ₹10,000 - ₹3,000 = ₹7,000
50% of salary (metro city): ₹15,000

Among these the lowest is ₹7,000, therefore ₹7,000 per month of HRA is exempt from tax.

Why Learning About HRA Is Important

Understanding the mechanism of HRA can be of great help in financial management. This will help to ensure the right tax is paid and the benefits are not overlooked. In case you are renting, this allowance through lowering tax liability can be quite a nice addition to your salary that you take home.

Ways to Get the Most Out of Your HRA

Always have ready rent receipts and a proper rental agreement.
Work out the details of your pay so that there will be more HRA and less of other components.

In case of a city change due to your work, make sure your HR knows about your new address if you want to get the right HRA exemption.