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Income Tax Calculation on HRA (House Rent Allowance) in India for year 2025

 

Income Tax Calculation on HRA (House Rent Allowance) in India for year 2025

House Rent Allowance (HRA) is an essential component of an employee’s salary structure and provides a significant benefit in terms of tax savings under the Income Tax Act, 1961. The exemption on HRA aims to support employees in managing their rental expenses. Here's a detailed guide on HRA tax calculation for the financial year 2025-26.



What is HRA?

House Rent Allowance (HRA) is a part of the salary provided by employers to employees to meet rental expenses. It is applicable only to salaried individuals residing in rented accommodations. Self-employed individuals cannot claim HRA but may avail of tax benefits on rent paid under Section 80GG.

Key Conditions for HRA Exemption

To claim HRA exemption:

  1. The employee must live in a rented house.
  2. Rent receipts must be provided as proof.
  3. If the annual rent exceeds ₹1,00,000, the landlord’s PAN must be furnished.
  4. HRA exemption cannot exceed the actual HRA received.

How is House Rent Allowance (HRA) Calculated

The amount of tax deduction that can be claimed over HRA is the least of the following:

  • Actual rent paid minus 10% of the basic salary, or
  • Actual HRA offered by the employer, or
  • 50% of salary when residential house is situated in Mumbai, Delhi, Chennai or Kolkata; 40% of salary when residential house is situated elsewhere

Example Calculation

Let’s understand HRA tax exemption with an example:

Scenario:

  • Basic Salary: ₹60,000 per month
  • Dearness Allowance: ₹10,000 per month
  • HRA Received: ₹30,000 per month
  • Rent Paid: ₹35,000 per month
  • Location: Chennai (Metro City)

Step 1: Calculate Annual Figures:

  • Basic Salary: ₹60,000 × 12 = ₹7,20,000
  • Dearness Allowance: ₹10,000 × 12 = ₹1,20,000
  • HRA Received: ₹30,000 × 12 = ₹3,60,000
  • Rent Paid: ₹35,000 × 12 = ₹4,20,000
  • Total Salary (Basic + DA): ₹7,20,000 + ₹1,20,000 = ₹8,40,000

Step 2: Determine Exemption Components:

  1. Actual HRA Received: ₹3,60,000
  2. 50% of Salary (Metro City): 50% × ₹8,40,000 = ₹4,20,000
  3. Excess of Rent Paid Over 10% of Salary:
    • Rent Paid: ₹4,20,000
    • 10% of Salary: 10% × ₹8,40,000 = ₹84,000
    • Excess: ₹4,20,000 - ₹84,000 = ₹3,36,000

Step 3: Calculate Exemption: The least of the above values is ₹3,36,000. This amount is exempt from tax, while the balance HRA of ₹60,000 (₹3,60,000 - ₹3,36,000) will be taxable.

Special Considerations

  1. Multiple Properties: If rent is paid for multiple houses, the exemption calculation considers the total rent paid.
  2. Living with Parents: An employee can claim HRA exemption by paying rent to their parents, provided a valid rental agreement and receipts are maintained. However, the parents must declare this rental income.
  3. Section 80GG: Self-employed individuals or salaried employees not receiving HRA can claim deductions under Section 80GG, subject to conditions.

Documents Required for HRA Exemption

  1. Rent receipts (with landlord’s details).
  2. Rental agreement (if applicable).
  3. Landlord’s PAN (mandatory if annual rent exceeds ₹1,00,000).

Conclusion

Proper planning and documentation can help salaried employees maximize HRA-related tax benefits. Understanding the nuances of HRA exemption rules ensures compliance and significant savings on taxable income. 

It is advisable to consult a qualified Chartered Accountant for personalized guidance on HRA and other tax-saving strategies.

Location: Chennai, Tamil Nadu, India

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