Most of us pay more tax by neglecting to know about House Rent Allowance(HRA) component in our payslip.
What is HRA?
HRA is house rent allowance offered by employers to all its employees. HRA is exempted from taxable income and hence reduces the tax paid by an employee.
How HRA is calculated?
The HRA calculated by the employer is the minimum of the following three amount.
1. Actual HRA given by the employer as mentioned in the payslip.
2. Acutal rent paid by employee minus(-) 10% of his/her basic salary
3. 50% of basic salary in metro cities(delhi,mumbai,chennai,calcutta) or 40% of basic salary in other cities.
Lets take an example.
Ram lives in a house in bangalore and pays a rent of 7,000. The HRA offered by his employee is 6000/month and his basic salary is 20,000/month. Let us calculate the three amount stated above
1. HRA offered = 6,000
2. Rent - 10% of basic = 7,000 - 10% of 20,000 = 5,000
3. 40% of basic salary = 40% of 20,000 = 8,000
Hence minimum of the three , 5,000 is taken as HRA and 12*5,000 = 60,000 is exempted from tax for the current financial year.
Note : You have to pay monthly rent receipts to your employer and you can not have short routes in stating wrong rents paid by you.