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Understanding how HRA works!

By BankBazaar.com | Strategic Moves 23 hours ago

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The end of another financial year is drawing close and is a couple of months away. The words"income tax" start ringing a frantic bell towards the end of every financial year and many

!uestions arise. Please do note that it is best to be prepared in the beginning rather than the end

of a financial year

There are many tax components you need to be clear about and also figure out how to plan your

investments to gain maximum returns as well as maximum tax benefits. #ne such tax component

is the tax benefit you can claim from your house rent allowance. This article helps you

understand how this wor$s

%&' (house rent allowance) is provided to salaried people under Section 1* (13') of +ncome

Tax 'ct 1,-1 in accordance with rule ' of +ncome Tax &ules. Self employed professionals areeligible for tax deductions under section /*00 of +ncome Tax 'ct 1,-1.

Dependent factors

hen you are calculating %&' for tax exemption you ta$e into consideration four aspects whichincludes salary %&' received the actual rent paid and where you reside i.e. if it is a metro or

non2metro. +f these aspects remain constant through the year then tax exemption is calculated as

a whole annually if this is subect to change as in a rent hi$e or shift in residence etc. then it iscalculated on a monthly basis.

The place of residence is significant in %&' calculation as for a metro the tax exemption for%&' is 4*5 of the basic salary while for non2metros it is 6*5 of the basic salary.

On paying rent

+t is not essential that you should pay rent only to a landlord to avail your %&' benefits. 7ou canpay rent to your parents to claim tax benefits. %owever they need to account for the same under

8+ncome from house9property: and will be entitled to pay tax for the same.

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8/10/2019 HRA Calculation

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&emember you cannot try the same with your spouse as it is not permissible under income tax

law as you are expected to reside together for all practical purposes.

7ou need to submit proof of rent paid through rent receipts for which only two need to besubmitted one for the beginning of the year and one towards the end of the financial year. +t

should have a one rupee revenue stamp affixed with the signature of the person who has receivedthe rent along with other details such as the rented residence address rent paid name of the

person who rents it etc.

How is HRA calculated

To figure out how much %&' exemption you are eligible for consider these three values which

includes a. The actual rent allowance the employer provides you as part of your salary b. the

actual rent you pay for your house from which 1*5 of your basic pay is deducted c. 4*5 ofyour basic salary when you reside in a metro or 6*5 if you reside in a non2metro.

The least value of these three values is allowed as tax exemption on your %&'. 7ou can discussrestructuring your pay structure with your employer in order to avail the most of your %&' tax

benefit.

%ere is a sample illustration for your understanding;

Sheetal earns a basic salary of &s. 6**** per month and rents an apartment in &s. ,***.

Availing tax benefits on your home loan and HRA

's long as you are paying rent for an accommodation you can claim tax benefits on the %&'

component of your salary while also availing tax benefits on your home loan. This could be the

case if your own home is rented out or you wor$ from another city etc. %owever you need toaccount for any rental income you receive from the property you own.