How to plan HRA exemptions

I know many fellas who go crazy when it comes to collecting IT proofs in India esp. about HRA. Normally they will go with an approximate amount which is close to HRA s/he actually has been paid. This may not be a right approach always.

HRA is calculated as follows:

• Actual amount of HRA received during the relevant period.
• Rent paid less 10% of Basic Salary
• An amount equal to 50 percent of basic salary , where the residential house is situated at Mumbai, Calcutta, Chennai, Delhi and an amount equal to 40% of salary where the residential house is situated at any other place

E.g. Let's take an example and see what will happen in a scenario where
Monthly Basic is 35000, HRA is 19000 and Rent paid is 19000.

• Actual amount of HRA = 19000.
• Rent paid less 10% of Basic Salary = 19000 - 3500 = 15500
• An amount equal to 50% or 40% of basic salary 35000 * 0.50 = 17500.00

In this case the amount that will be taken in account for exemption will be 15500 per month.

Had the rent been calculated more closely, income tax payee would have been at advantage. I follow a simple method, rent should be calculated as follows.

Actual Rent - 10% of Basic should be > HRA Paid

In above example - the rent can be calculated as follows.

Actual Rent - 3500 should be > 19000

One of the closest number could be be 23000.00 in which case, the revised calculation of HRA will be as follows.

• Actual amount of HRA = 19000.
• Rent paid less 10% of Basic Salary = 23000 - 3500 = 19500
• An amount equal to 50% or 40% of basic salary 35000 * 0.50 = 17500.00

Least of the above calculated amounts is 17500.00 which means a yearly Tax Exempted amount would be 24000 (12 * (17500 - 15500)) and a net tax benefit of 7200 if you are falling in 30% tax bracket. :-)

Hope this helps.