HRA Calculation To Save Tax on Salary Income FY 2018-19

New Financial year 2018-19 has already started and so does tax planning. Employees shall plan their salary structure in the yearly appraisals to gain maximum tax exemptions possible as per budget 2018 announcements. HRA Exemption is one of the most important calculation in order to save tax on your salary income. 

HRA Exemption Calculation

House Rent Allowance exemption can be calculated using a simple formula given by the income tax department. HRA exemption amount will be the lowest among the three values obtained below:

• Actual Rent Paid – 10% of Basic Salary
• Actual HRA Received
• 40% or 50% of Basic salary

Actual rent paid in the calculation of first value is the rent paid by employee for his/her residential accommodation.  The rent has to be genuine and relevant proofs have to be submitted with the employer in order to avail the tax exemption.

Third value is derived by the type of city in which the employee resides. For all the employees who have rental accommodation in a non-metro city will get 40% and metro city employees are eligible for 50% limit.

Taxable component of HRA is calculated by deducting the above calculated exemption amount from the actual HRA received by the employee. Let’s try to understand with an example:

Employee A has a rented house in non-metro city with monthly rental of Rs. 10,000. His HRA is Rs. 1,50,000 per annum and Basic salary is Rs. 3,00,000 per annum.

HRA exemption will be lower of

• Rs. 120,000 (Actual Rent Paid) – 30,000(10% of Basic Salary i.e. 300000 ) = Rs. 90,000
• Actual HRA Received = Rs. 150,000
• 40% of Basic Salary i.e. 300,000 = Rs. 1,20,000

Therefore, tax exemption on account of HRA for the employee would be Rs. 90,000. Taxable component of HRA will be Rs. 150,000 – Rs. 90,000 = Rs. 60,000

If Employee A has an option to reduce HRA amount and increase amount in any other head of salary then he/she shall restrict the House rent allowance amount to Rs. 60,000 itself.

Save Tax on Salary Income

In the new financial year, many employers give opportunity to the employees to re-plan salary structure of the flexible pay portion. Employees shall take care of the HRA calculation and ensure the amount to be close to the exemption they will be getting so that they can take benefit of other heads as well for tax planning.

Below is the list of exemptions you can opt for financial year 2018-19

Salary Head	Tax Benefit
HRA	Tax exemption based on formula explained.
Leave Travel Allowance	Tax free for 2 trips in 4 years
Children Education Allowance	Rs. 200 per month per child for maximum 2 children
Children Hostel Allowance	Rs. 300 per month per child for maximum 2 children
Telephone Expense Reimbursement	Broadband/mobile/landline bills reimbursement tax-free

With the new financial year, the new standard deduction of Rs. 40,000 is applicable for salaried employees therefore, this year you will not have transport allowance and medical reimbursement exemptions available. Calculate your income tax and plan your salary structure in advance!