Understanding Indian Salary Slip - Importance of HRA

House Rent Allowance

This is also very interesting component of CTC. As name suggest its allowance to pay rent for rented house. So what if you are not staying in rented house? What benefit you get if you are staying in rented house? Find all answers below.

This component is completely paid in the monthly salary. This is basically tax saving component. If you are staying in rented house then you can claim the rent amount and thus you save some income tax. Though this is bit complex calculation, find below simplified with example.

HRA exemption (monthly) is calculated as minimum of below 3 items.

1. HRA Received in Salary
2. 40% Basic salary
3. Total HRA claimed – 10% Basic salary

So for example

Basic salary: 15000

HRA: 5000

Rent paid every month: 8000

As per point No 1) total HRA received per month in salary: 5000

As per point No 2) 40% of Basic salary: 6000

As per point No 3) (Total HRA Claim - Rent paid every month) 8000 – 1500(10% Basic Salary): 6500

So HRA exemption will be 5000. So every month 5000 will be deducted from Taxable income. It means you don’t pay any tax on HRA you receive every month in salary.

Those who stay in their home do not get any tax benefit on HRA. But if you have taken home loan to purchase your home then you can save lots of tax. Look for my next posting on Tax saving tips where this point will be explained.

As we understood from above paragraphs that we can really save some Tax from HRA. What is the exact Tax benefit for the people who stay on rented house compared to people who leave in their own house? Find below the answer.

For example Taxable income for people who stay in their own house for the financial year is 5,20,000.

As per the 2011 Income tax rule, Income tax paid is:

(As per 2011 Income Tax Rule, there is no tax for salary below 1,60,000)

1,60,001 to 5,00,00 income tax rate is 10%: (500000 – 160000)*0.1 (10%) = 34000

+

5,00,001 to 8,00,000 income tax rate is 20%: (5,20,000 -5,00,000)*0.2(20%) = 4000

Total income tax is 38000.

For the people who stay in rented house and claim 5000 HRA (per month) for Tax exemption, the taxable income for the financial year will be:

5,20,000 – 60,000 (5000*12 months) = 4,60,000

As per the 2011 Income tax rule, Income tax paid is:

(As per 2011 Income Tax Rule, there is no tax for salary below 1,60,000)

1,60,001 to 5,00,00 income tax rate is 10%: (460000 – 160000)*0.1 (10%) = 30000

Total income tax is 30000.

So the saving due HRA component for people staying in rented house as compared to people staying in own house will be:

38000 – 30000 = 8000.

I hope HRA component is simplified and easy to understand for many of you.