How hra tax exemption is calculated
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HRA is a tax benefit given to people who work for the government in India. It is an acronym that stands for "Home Rent Allowance," though is sometimes referred to as "House Rent Allowance." In addition to receiving his normal salary, a worker is paid by check every week for a certain amount of money to use towards paying the rent on the home he lives in. Two types of government employees qualify for HRA - those who are forced to stay in a home away from their normal one while they perform their duties for work, and those who have to commute great distances to make it to their job.
The amount of money a person receives per week for his HRA is the smallest of the following three calculations. The first is a standard amount that is offered by an employer to all of its employees. For example, an employer could offer $6,000 per month to all of it's employees.
The second way is to calculate whatever the amount of rent the employee is paying and to subtract 10% of their salary. So if an employee is paying $10,000 for rent a month and is making $20,000 a month, the calculation would be 10,000 - 10% of 20,000 (or 2,000) which would be $8,000.
The third way is to simply give half of the salary people who work
in major cities or 40% of the salary of people who work in smaller cities. For example if you work in a major city like Mumbai and the average monthly salary is $20,000, your company will give you $10,000 for HRA. If you live in a minor city and the average monthly salary is $20,000 your company will give you $8,000 for HRA.
Whichever of these three calculations returns the smallest number is the amount of HRA a person will actually receive.
The money a person receives for her home rent allowance cannot be taxed by the government when that person files her annual income taxes. She can simply deduct the amount of money she received in a year for HRA on their taxes. However, for this to happen, a person has to meet the following three criteria. The first is that she must be receiving her home rent allowance as a standard part of her overall yearly salary. The second is that she cannot be using HRA to pay off a mortgage of some kind - she must be renting the home they are living in for work. Lastly, the overall rent per year of the home has to be over 10% of her total yearly salary. As long as a person meets all three of these criteria, she can claim HRA on their taxes and that money will not be subjected to taxes of any kind.Source: ehow.com