Jan 19, 2009

How to Claim Maximum HRA Tax Exemption

So, by now you know How to Calculate HRA Tax Exemption and also 4 Ways of Claiming HRA either solely or along with home loan interest tax deduction.

But, do you know how to claim maximum HRA tax exemption or deduction? Well, here we deal with two such basic questions:

First, how to design CTC (cost-to-company) package so that the HRA component of the CTC is the maximum allowed by the I.T.Act and one can claim the HRA tax exemption to the maximum extent possible?

Second, how to claim the entire HRA received as exempt?

How to design CTC so that one can take the HRA exemption to the maximum extent possible?
While designing salary package, one should always ensure that the employer has designed it in such a way as to get the maximum possible tax benefit.

Let’s Continue with the same example as mentioned in the previous post ‘How to calculate HRA tax exemption where we assumed that you’re residing in Mumbai and paying a rent of Rs 20,000 per month and that your total CTC is Rs 70,000 (Basic Rs. 50,000 and HRA Rs 20,000). If you give a second look and analyze the above example, you’ll notice that the salary package is not designed in an optimum or tax efficient manner. How? What’s wrong in the above salary package?

Let’s say your rent is increased and you have started paying a rent of Rs 31,000 p.m. Rest of the assumptions remains the same. Now, the least of following three figures will be exempt:

1. HRA received i.e., Rs. 20,000
2. Rent above 10% of basic i.e., Rs. 26,000 (Rs. 31,000 – Rs. 5,000)
3. 50% of basic i.e., Rs. 25,000
The least of the three is Rs 20,000; hence, the amount of HRA exempt will be Rs 20,000 p.m. and your total taxable income will become Rs. 50,000 p.m. (Rs 6,00,000 p.a.) whereas it can be less than that.

So, what’s the catch? Actually, we have assumed that you are residing in Bombay and for that the tax law allows you to receive a maximum amount up to 50% of the basic salary as HRA whereas in the above case study your employer is allowing you only 40 per cent of the basic as HRA.

Now, you’ll ask if the employer changes the CTC pay package and increases the HRA component of the package to 50% of the basic, won’t the CTC gets increased. Yes, surely the CTC will increase but there is other way around. Your total CTC is Rs. 70,000 comprising just basic plus HRA (with no other allowances or benefits as assumed) and second condition is the HRA should comprise 50% of your basic. It’s simple maths; just divide your total CTC with 1.5 and you’ll get the basic part and multiple the basic with 0.5 and you’ll get the HRA part. So, here we arrive at a basic of Rs. 46,666 and HRA of Rs 23,334. Now, just recalculate the HRA tax examption, you’ll find the entire revised HRA of Rs 23,334 is exempt and your total taxable income reduces from Rs 6 lakh p.a. to Rs 5.60 lakh p.a.

Thus, in the above case study, by changing your salary structure and molding it according to tax laws, increases your HRA tax exemption from Rs 20,000 to Rs 23,334 the maximum allowed under the Income Tax Act.

In a nutshell, make sure that your company provides 40% or 50% (depending on the location) of the basic salary as HRA to make your CTC tax efficient.

Is it possible to claim the entire amount of HRA received as exempt?
Yes, why not? If the actual rent paid by you exceeds the HRA received by an amount equivalent to 10% of the basic (+DA), then the entire amount of HRA gets exempted. Put another way, if you want to claim the entire amount of HRA as exempt, then you should be paying a minimum rent of 60% of your basic pay for metros and 50% for non-metros. But the exemption can’t go beyond that even if you’re actually receiving more HRA, say, 70% or 80% of your basic as part of your salary package.

Please also note that it’s possible to get the entire HRA received as exempt but it’s not possible to get the entire amount of rent paid as exempt. In other words, rent paid up to an amount equivalent to 10% of the basic (+DA) is always included in your income irrespective of the actual amount of HRA received and rent paid by you.
If you've any other question or query relating to HRA, please read "How to Claim HRA Tax Exemption - Tips & FAQs".
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  1. Really Wonderful writeup. Please keep up the good work, it has really helped people like me.

  2. Writeup is fantastic but also knowledgable.However I have a query on maximum rental chargeable. You have rightfully considered one aspect of Salaried person. But in most cases the recepient is the relative like father, mother etc or a friend in which case receiving maximum rental would be subject to TDS ( Rs 120000 per annum) or now Service Tax which is applicable retrospectively. Moreover rent received is also considered additional income. I would request you to enlight on the other aspect, that is, recepient of house rent Ramgp

  3. Sir, I am a state government employee working in a city which is different from where my family is living. But i use to visit my family once in 15 days.I pay rent in both cities. can i claim rent paid in other city i.e, where my family lives as my rent paid for my family is higher


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