HRA is a typical part of the compensation package that firms offer to their staff. It is given to employees who live in rented accommodation to help them meet the cost of renting a house. The HRA component of the salary is also beneficial for income tax purposes, as it provides tax benefits to the employees. In this blog, we will discuss the Benefits of HRA calculation for income tax for salary.
What is HRA?
HRA is a component of the salary package that is provided by an employer to an employee who is living in a rented accommodation. It is given to employees to help them meet the cost of renting a house. The HRA component of the salary is exempt from tax to a certain extent under the Income Tax Act, 1961.
Benefits of HRA Calculation for Income Tax
The HRA component of the salary is exempt from tax to a certain extent under Section 10(13A) of the Income Tax Act. The exemption is available to the extent of the least of the following amounts:
The real HRA that the employee received
The amount by which the rent paid by the employee exceeds 10% of his salary
50% of the employee’s salary if he is living in a metro city (i.e., Mumbai, Delhi, Kolkata or Chennai), or 40% of the salary if he is living in a non-metro city.
Reduced Tax Liability
By availing the tax exemption available on the HRA component of the salary, employees can reduce their tax liability. The amount of tax saved depends on the amount of HRA received, the rent paid, and the salary of the employee.
Increased Take-Home Salary
Since the HRA component of the salary is exempt from tax to a certain extent, employees can increase their take-home salary by maximizing the tax exemption available on HRA. By doing so, employees can reduce the tax deducted at source (TDS) from their salary, resulting in an increased take-home salary.
Lower Tax Liability on Home Loan
If an employee is living in a rented accommodation and has also taken a home loan, he can claim tax benefits on both the HRA received and the interest paid on the home loan. By doing so, the employee can reduce his tax liability on both the HRA and the home loan.
The HRA component of the salary provides tax benefits to employees who live in rented accommodation. By availing the tax exemption available on HRA, employees can reduce their tax liability, increase their take-home salary, and lower their tax liability on home loans. Therefore, it is essential for employees to calculate the HRA component of their salary correctly and claim the tax exemption available on it. Employers should also ensure that they calculate and provide the HRA component of the salary accurately to their employees to avoid any tax-related issues in the future.