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House Rent Allowance (HRA) is a compensation payable to salaried employees as one of the components of salary that covers their rental expenses. It is a part of salary that allows employees living in rental property to claim exemptions, which otherwise is subject to taxation. Upon receiving HRA, employees can bring down their taxable income.
If you are eligible to claim HRA, you must figure out what part of your monthly salary is exempt from tax. To do so, you can use an HRA calculator.
What is an HRA Calculator?
An HRA calculator is an online tool that determines the amount of compensation you will receive to meet your monthly rental expenditure. This amount varies for different employees, depending on their salary structure and place of residence. It uses the input provided by an employee on such factors.
How Does an HRA Calculator Work?
An HRA calculator is a financial tool that uses a mathematical formula to evaluate how much amount you need to pay out of your monthly salary as tax on HRA. It computes the value of the exempted and taxable amount of HRA based on the total rent you pay. You must understand its formula to further know how an HRA exemption calculator works.
Formula to Calculate HRA
Let’s go through the following formula and an example to understand how this tool calculates the HRA amount from salary.
HRA Amount = Actual Rent Paid - (10% * Basic Salary + Dearness Allowance Amount)
Suppose you are a salaried employee in Kolkata earning a basic salary of ₹23,000. You reside in a rental property and pay a monthly rent of ₹12,000. Moreover, you receive ₹15,000 as a monthly house rent allowance from your company.
Let’s figure out how much tax deduction you can claim in this case.
By putting in the values, we can calculate the amount of tax exemption. As per the HRA calculation for income tax rules, you can claim the least amount from the following as your amount of tax deduction.
- In the first instance, HRA exemption amount = Actual Rent Paid - (10% * Basic Salary + Dearness Allowance Amount) = ₹[(12,000) - (10% * 23,000)] = ₹9,700.
- For the second instance, we consider the HRA amount as the amount you receive from your company, that is ₹15,000 in this case.
- In the third instance, we will consider the HRA amount as 50% of your basic salary since you live in a metro city, which is 50% of ₹23,000. Therefore, the HRA amount will stand at ₹11,500.
Among the three given instances, you will acquire the least amount from the first one. Hence, you will receive an exemption of ₹9,700 on your taxable income after using the HRA calculation formula.
How to use the HRA Calculator?
Follow the step-by-step guide with due diligence to evaluate the HRA exemption and taxable amount using a calculator.
- Step 1: Enter the amount of basic salary you receive.
- Step 2: Fill in the amount of dearness allowance you receive.
- Step 3: Now enter the amount of House Rent Allowance you received from your employer.
- Step 4: Enter the total rent you have paid.
- Step 5: Choose the type of location where you reside. You will have to select one of the two available options, Metro or Non-Metro City.
Now, the house rent allowance calculator will display the applicable tax rate and the taxable amount of the house rent allowance. It will also calculate the amount of HRA that will be exempted from taxation.
Advantages of Using the HRA Calculator
Let’s discuss some of the advantages and reasons why you should consider using the HRA calculator instead of manually calculating the amount.
- Most employees are generally unaware of how the amount of allowance varies for different locations of residence. On that note, an employee can first of all find out whether he/she is available to claim tax exemption by using this tool.
- This tool helps an individual with tax filing and overall financial planning by finding out the amount they can save from making tax payments.
- Manual calculation using the above-mentioned HRA formula can be time-consuming. As an alternative, you can use the HRA calculator to get instant results with just one click of a button.
- An HRA calculator displays accurate results and eliminates all possibilities of making human errors that are otherwise involved in the manual calculation procedure.
- It is an automated tool that functions after accounting for all the multiple factors or variables that affect the amount of HRA you receive.
- It has a user-friendly interface that can be conveniently used by following a few easy steps.
Hopefully, now you have a clear idea about how to determine your HRA amount from your monthly/yearly salary. Before using an HRA calculator to compute your tax liability, make sure to understand your salary structure and input the details into the tool accordingly.