HRA – Importance and meaning

What is the full form of HRA?

The full form of HRA is “House Rent Allowance.” Employees receive HRA as a part of their salary package. It’s designed to help your employees with their housing related finances.

Understanding HRA in Salary

HRA is an important part of employee salary structure and as we discussed it’s provided to employees to help them with their expenses related to housing.

But you should know that the organization has the ability to decide on the amount of HRA while they’re creating their policies. So, whatever amount of HRA your employees receive will depend on your organizational policies. The other components that can affect this amount are employee’s salary and the city (or location) where they reside.

HRA Exemption Limit

Exemption limit is basically the maximum amount an employee can claim as exempt from income tax. It’s one of the key parts of HRA.

While the entire amount of HRA is not taxable, it’s important for you to understand that certain portions of it are exempt from income tax. You can determine the exemptions based on the following factors:

• The total amount of HRA the employee has received as a part of their entire salary package.
• Your employees’ entire salary comprises of basic salary and dearness allowance (if your company provides that). The exemption amount is calculated as a percentage of the employee’s salary.
• The amount of rent your employees pay also plays a crucial role in determining the amount of exemption. You can check it through their rent receipts, and it should be more than 10% of their salary.

How to Calculate HRA in Salary

 You can calculate the HRA exemption using a specific formula. To get an accurate number, you’ll have to take at least three factors.

• The first factor you’ll need to consider is the actual HRA your employee has received from your employer.
• The second factor to consider is whether the rent amount paid exceeds 10% of the salary or not. It means (rent paid – 10% of salary). This amount will represent how much amount of rent paid exceeds is the 10% of your employee salary.
• The government set a particular amount that can be exempted depending on the type of city you’re in. For instance, in metro cities, 50% of your basic salary and in non-metro cities, 40% of your salary are exempted.

You can use these three factors to the least to claim the amount for HRA exemption when you (or your employee).

The least of these three factors is the amount that can be claimed as HRA exemption while filing income tax returns.

HRA Rules

Let’s go over the HRA rules to ensure that everyone abide by the legal regulations.

• The first thing to keep in mind is that your employee should have a valid rental agreement with their landlord as a proof of their residence.
• The rent receipts for all payments made to landlord should be maintained properly.
• The amount that employees show as rent for the accommodation where they reside must be rented.

Any misuse of the fraudulent HRA claim may result in tax liabilities, so it’s important to ensure that the regulations are followed.