Confused About HRA Calculation: Is It Based on Gross or Basic Salary in CTC?

I have a doubt about HRA. Can we calculate HRA on GROSS SALARY while preparing the CTC breakup? As far as my knowledge is concerned, HRA is calculated on BASIC Salary. Please give your comments on this... It's a little urgent. Looking forward to some prompt responses, friends.

Regards

You are right! HRA is a subsidiary allowance and it has to be considered on a basis and not on gross. Gross is the sum of all the payable factors and allowances, either in monthly or daily mode.

The Minimum HRA Act

As per The Minimum HRA Act, the HRA should be at least 5% of the Basic. In such a case, you can have a certain percentage (not less than 5%) as HRA on Basic, which will be part of your gross salary structure.

Hope you will find it helpful.

Regards,
Atul S Malve
Manager - HR & Admin

HRA Calculation Basics

HRA is calculated on the Basic + DA amount of wages. It is 40% for Non-Metro cities and 50% for Metro Cities.

Tax Exemption Rules

After that, for the purpose of tax exemption, there are certain rules of HRA.

Regards,
Pradeep

Hi Sir, Is there any fixed percentage for HRA in the salary structure? If the answer is yes, where exactly is it defined? Can we change the percentage of the salary component from employee to employee while considering their tax benefits, or should it be uniform for all employees? Please advise. Regards, Vinutha

The thread was started in 2011, and it is good that it is still alive.

HRA as a Component of Salary

HRA is a component of salary. It is included in the salary to make the employee eligible for some tax benefits. The basic idea nowadays is not tax benefits but to reduce the burden on employers from certain statutory contributions like PF, Gratuity, Bonus, etc. That is why they are paying HRA without any reference to where the employee stays, whether in a rented house or owned house, and whether the spouse is getting HRA or not.

Legal Considerations for HRA

To be legally correct, the HRA should be based on salary. Here, the salary should be gross salary and not merely basic salary. HRA should not be at the same percentage for all employees. It shall depend upon the city of residence. As stated above, it should be paid only to those who reside in a rented house. There are some conditions, like you can stay with your parents and pay rent to parents, but you cannot claim rent for staying in a house owned by your spouse or rented out by the spouse. Income Tax exemption is based on three parameters and shall be the least of the following:

(1) The actual rent that is paid should be less than 10% of the basic salary (Basic salary shall include dearness allowances, other allowances including commission based on sales).

(2) In case you're staying in a metro, 50% of the basic salary and 40% if you live in a non-metro city.

(3) The actual amount received as the HRA from the employer.

Impact on Salary Structuring

The above HRA exemption factors will not influence your salary structuring. In salary structuring, therefore, a common understanding is available, and that is a certain percentage of your basic salary. Still, when you pay it across all employees, the objective of paying HRA will be defeated. It is seen that even in the case of employees whose salary will not come under IT brackets are paid a huge amount as HRA just to reduce the employer's contribution to PF or gratuity. This may have a negative effect in the future if anyone objects to it. Therefore, it is advisable to pay HRA only to those who actually reside in rented houses. Then it will become an allowance out of the purview of salary.